Investing is the key to becoming wealthy, but the IRS is always at your side trying to claim its share. The best way to keep the tax man at bay is to invest in tax-favored retirement accounts like IRAs. These special accounts don't tax you on the income and gains your investments pay you on your way toward retirement, instead offering some accountholders tax deferral and others tax-free growth.
Contributing to an IRA is a limited-time offer, though, and most years, you have to get your contribution in by April 15. However, with the extension that the IRS gave everyone to file their taxes by July 15, you've still got 100 days left to set up and put money into an IRA for the 2019 tax year -- and get the tax benefits on the return you're about to file.
Let's go through what you need to do to take advantage of this gift that the IRS has made available to taxpayers across the country.
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Taking care of some preliminaries
If you don't already have an IRA set up somewhere, then there are a few preliminary steps you'll need to do first:
- Choose a financial institution: You can open an IRA at just about any brokerage company, bank, mutual fund company, insurance company, or other financial institution. You'll want to be sure that the particular IRA provider you choose offers the investments you're interested in, as some institutions have a limited menu of investment selections.
- Pick the kind of IRA you want: Traditional IRAs give you an upfront tax deduction that you can use to reduce your taxable income on your 2019 tax return, which is one reason why so many people like to use traditional IRAs as the tax filing deadline approaches. However, you'll pay taxes on withdrawals from traditional IRAs when you retire. With a Roth IRA, you don't get any upfront deductions, but you'll be able to take money out of the Roth tax-free in retirement. Income limits apply to certain aspects of both types of IRAs, so be sure to know what your situation is before you get your heart set on one type or the other.
- Get the paperwork done: You'll need to fill out IRA application forms to open your account. Part of that process will involve selecting a beneficiary to receive your IRA assets upon your death. Note that your last will and testament generally won't control where your IRA money goes -- the beneficiary designation takes precedence.
Get your money together
The limits on 2019 IRA deductions are $6,000 for those who weren't 50 years old as of Dec. 31, 2019, or $7,000 if you were 50 or older at the end of 2019. If you earned less than that from a job, self-employment, or other work, then your contribution is limited to the amount of earned income you have -- unless you're married and your spouse had excess income above the contribution limit that lets you open a spousal IRA.
Smaller contributions are also allowed. Many IRA providers will open accounts with very small amounts of money, especially if you're willing to participate in automatic investment plans that take money straight out of your bank account every month.
Don't wait!
Just because you have until July 15 to make an IRA contribution for the 2019 tax year doesn't mean you should wait that long. The sooner you get money into your retirement account, the sooner it'll start working for you, growing in whatever investments you choose.
IRAs are great tools to let you save for retirement. Get moving on an IRA today, and you'll be that much closer to reaching your retirement goals.
