IRA contributions improve your retirement readiness, and if you use a traditional account, you can also earn a tax break. It's simplest to make your contributions during the tax year you intend them to count toward, but prior-year IRA contributions are possible. Below, we'll look at how to do them and why you might want to.
What's the benefit of making prior-year IRA contributions?
Prior-year IRA contributions enable you to save money in a tax-advantaged account without counting against the current year's contribution limits. In 2023, you could contribute $6,500 to an IRA if you were under 50 for the whole year or $7,500 if you were 50 or older by Dec. 31. These limits have risen to $7,000 and $8,000, respectively, for 2024.
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If you got an extra $5,000, for example, from a work bonus or a raise at the end of 2023, you could put that money into your IRA as a 2024 contribution. But then you'd only be able to contribute an extra $2,000 to $3,000 more, depending on your age, for the rest of this year. You'd also have to wait until 2025 to claim the tax deduction you're eligible for.
By making a prior-year contribution, you can claim that tax deduction on the 2023 tax return you'll file in the next couple of months. And you'll still be able to contribute up to $7,000 or $8,000 to your IRA for 2024 if you're able to do so.
But there are a few caveats you need to aware of: First, you cannot exceed the annual contribution limits for the year you're applying your contribution to. Doing so could lead to costly tax penalties.
Second, you should note the contribution limits discussed above apply to all of your IRAs, not to each account individually. If you'd like to set aside more money for retirement than your IRA allows, you'll need to use another savings vehicle.
And third, the last day to make your prior-year contribution is April 15, which is also the deadline to file and pay your taxes for 2023.
How do you make a prior-year IRA contribution?
You can usually make a current-year IRA contribution online by simply indicating how much you'd like to set aside and scheduling an automatic funds transfer from a linked bank account. The process is similar for prior-year contributions. However, some providers may not enable you to specify the tax year you want the contributions applied to.
In this case, you'll need to contact your IRA provider to find out how to ensure it applies your contribution to the previous year. If you don't do this, chances are your provider will apply your contributions to 2024 instead of 2023, and you'll wind up with a tax headache if you try to claim the deduction on your 2023 return.
It's best to make any prior-year contributions before you file your taxes. If you wait until after, you'll have to file an amended return and that means more time doing taxes and extra fees. So if this is something you're interested in doing, it's best to get the ball rolling right away.
