The 2022 tax year is now over and you'll soon have to submit your tax return, outlining how much you earned and which deductions and credits you qualify for. There are many ways to shave a little off your tax bill, including stashing money in your retirement account. But certain accounts, like 401(k)s, only enable you to make contributions for the current tax year.
Fortunately, that's not the case with all retirement accounts. If you'd still like to make a 2022 retirement contribution, here's what you need to do.
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You'll need an IRA
IRAs allow prior-year retirement contributions, so you'll need to open one of these accounts if you don't already have one. You can choose between a traditional IRA and a Roth IRA, depending on when you'd like to pay taxes on your funds.
Traditional IRAs are the way to go if you want your tax break right now. Every dollar you put into one of these accounts reduces your taxable income for the year, but in exchange, you have to pay taxes on your withdrawals later. This is a popular choice with those who expect to be in a lower tax bracket in retirement than they're in right now.
Roth IRAs won't give you any sort of tax break this year, but your retirement withdrawals from these accounts are tax-free. This could make a Roth IRA a great fit if you believe you'll be in the same or a higher tax bracket once you retire compared to today.
No matter which account you choose, you need to stay at or under the annual contribution limit. For the 2022 tax year, that's $6,000 if you're under 50 or $7,000 if you're 50 or older. For 2023, these limits rise by $500, respectively. Remember, these limits apply to all your IRA contributions for the year, not to each IRA individually. So if you choose to put some money in a traditional IRA and some in a Roth IRA, the total you place in both accounts cannot exceed $6,000 or $7,000, depending on your age.
Those who plan to make a Roth IRA contribution also need to be mindful of the income limits. If you earned too much in 2022, you may not be able to contribute to a Roth IRA directly. Normally, you can put money in a traditional IRA and do a Roth IRA conversion in the same year. But it's not possible to do a prior-year Roth conversion. So you'd have to settle for keeping your money in a traditional IRA for now and converting it in 2023 if you really want Roth funds.
How to make a prior-year IRA contribution
In order to make a prior-year IRA contribution, you must log in to your IRA account and indicate how much you'd like to contribute. You may also need to provide the information for the bank account you want the funds transferred from.
It's important to make sure you select the 2022 tax year if this is an option. Otherwise, your IRA provider will likely categorize it as a 2023 contribution by default. If you don't see any option to select your tax year, reach out to the account provider and inquire about how to make a prior-year contribution.
You must do this by the 2022 tax deadline, which is April 18, 2023. Ideally, you should do it before you file your 2022 tax return. If you don't, you'll have to pay to file an amended tax return in order to claim your tax break for your prior-year contribution.
Most providers don't make it too difficult to make a prior-year IRA contribution, but if you'd rather not jump through all these hoops, you could just make a 2023 contribution instead. You might even be able to set up an automatic contribution schedule that deducts funds from your bank account periodically so you don't have to make them on your own. Just remember to stay aware of contribution limits and try to make all your contributions before the end of the year.
