Many of us have the best intentions for doing smart things with our money. But then life gets away from us, and suddenly we realize an entire year has come and gone without making some of those key moves. Such might be the case if you failed to contribute to your IRA in 2018.
Unlike 401(k) plans, where contributions are deducted automatically from paychecks, IRAs require a little more hands-on involvement. Though some IRAs do allow you to set up automatic payments, it's often on you to write a check and fund your account. And when life gets busy, or when money gets tight, IRA contributions can easily fall by the wayside.
If you let all of 2018 go by without putting a dime into your IRA, it's actually not too late to contribute to last year's account. That's right: Unlike 401(k)s, you have until the following year's tax deadline to make contributions for the previous year. This means that the deadline for making contributions to your 2018 IRA is actually this year's tax filing deadline: April 15. Therefore, if you slacked on funding your 2018 IRA last year, consider this your wake-up call -- get moving before the upcoming deadline.
Why fund an IRA?
There are plenty of good reasons to save in an IRA. First, if you contribute to a traditional IRA, the money goes in tax-free. This means that by contributing to your 2018 traditional IRA, you get to lower your 2018 tax bill.
Although the annual IRA contribution limits have since risen, for the 2018 tax year, you can put in up to $5,500 if you're under 50, or $6,500 if you're 50 or older. Now let's say you max out last year's IRA at $5,500 and also have an effective tax rate of 30%. This means that by making that contribution, you'll shave $1,650 off your 2018 taxes -- just like that.
Another good reason to fund your IRA: The sooner you do, the more wealth you stand to accumulate for retirement. Thanks to the power of compounding, the money you put into your IRA gets to grow over time, assuming you invest it wisely. This means that if you put $5,500 into an IRA today and invest it at an average annual 7% return over a 30-year period (which is doable when loading up on stocks), it'll turn into roughly $42,000 over those three decades. Of course, you should always aim to max out your IRA year after year, but the point here is to illustrate that doing so for even a single year could have a big impact.
Keep in mind that IRAs come in two main varieties: traditional and Roth. With the latter, you don't get an immediate tax break for contributing, but there are other benefits you can reap, like tax-free growth and tax-free withdrawals in retirement. And for deadlines, it doesn't matter whether you're funding a traditional IRA or a Roth -- you still have until April 15, 2019, to contribute to your 2018 account.
At this point, you still have another three months to make your 2018 IRA contribution. But if you let the past calendar year go by without paying attention to that account, chances are you're at risk of repeating that mistake between now and April.
So don't let that happen. Write a check to your IRA and deposit it immediately. If anything, it'll eliminate one worry during the first part of the new year.