Each year, as we turn our calendars to January, we brace for the inevitable change that comes with a new year. The IRS has been on a tear regarding changes, increasing the allowable limits for retirement plan contributions in consecutive years. While you’re likely aware that you’re now able to contribute $7,000 to your IRA as opposed to last year’s $6,500 (investors under age 50), you may not be aware that the beginning of the year offers a unique advantage to you if you were not able to get your IRA funded last year.
The recommended 15%
The recommended rule of thumb for stashing (and investing) cash for retirement is 15% of your annual gross income. The reality is that sometimes, especially in a high inflation environment like 2023, life happens, and that 15% can get cut down or even eliminated in some cases. While it may feel like you’ve missed out on the ability to contribute to your Roth or Traditional IRA for 2023, it's actually not too late (yet). If you missed out on contributing or at least maxing out your IRA last year, you can take advantage of a unique moment in time. Prior to filing your 2023 taxes, you have the ability to catch up by double-dipping and making both a 2023 and 2024 IRA contribution.
Let’s look at an example:
You planned to save $541 per month into your Roth IRA last year, but you had a number of bigger expenses pop up and found yourself needing to pause your retirement contributions for a few months, so you only contributed $4,875 to your Roth IRA during the calendar year. Now, it’s 2024, and you’re getting back on track. You would like to fund your Roth IRA with the additional $1,625 to max it out. You’d also like to begin funding your Roth IRA for 2024 at $583 per month. Because you have not yet filed your taxes for 2023, you can take advantage of this unique moment in time by funding both accounts.
Let’s examine another scenario together:
You’re new to investing and recently decided you want to use some of your extra savings to fund a Roth IRA. You’re bummed that you missed out on the opportunity to open and fund an account in 2023, but you’re ready to get going now with a single max-out contribution for the year. You have $13,500 ready to be invested and want to compensate for lost time. Again, before filing your taxes for 2023, you’re allowed to max out your IRA for 2023 at $6,500 and for 2024 at $7,000.
Other Catch-up Options
For investors who are over the age of 50, your catch-up contribution can be tacked onto those max contribution amounts (an additional $1,000 per year), allowing you to contribute a total of $15,500. This is not a specific feature of this year, but it is a unique feature of IRAs, as they are not funded through payroll deductions like employer plans. If you’re married and file jointly, you can make an even bigger splash by maxing out IRAs for each of you and your spouse for the two years in question. If you’re 50 or older, that number can be as high as $31,000 that can be saved across your IRAs during this sweet spot for contributions.
If you work with a financial institution like a bank or a brokerage like Charles Schwab, you’ll want to be specific about the years for which you’re making contributions. If you’re a client of Whitaker Myers Wealth Managers, you should let your financial advisor know that you would like to take advantage of this moment in time by funding your IRA for last year before it’s too late.