Is It Too Late for Your 2011 IRA Contribution?

by Kevin on January 12, 2012

Don’t you hate when you intend to do something but life gets in the way and keeps you from getting it accomplished?

If that happened to you last your with your ambitions of opening a Roth IRA, don’t worry: you still have time to fulfill your contribution limit for 2011. Why can you still contribute to a Roth and how much time do you have?

When Do Roth Contributions Cut Off?

If you intended to set up an account with a Roth IRA provider but didn’t get around to it, have no fear. The time cut off where you will no longer be able to contribute for the previous tax year is April 15th of the following year. So for tax year 2011, you can contribute to a Roth IRA until April 15th, 2012. Once that date passes you will no longer be able to set aside money for a tax-free retirement for the previous year.

Don’t Fund This Year, Contribute to Last Year

Before you send a single cent in for the current tax year you want to make sure you absolutely maximize the previous tax year. There is no reason to not put in a full $5,000 for the previous tax year before you even start on this year’s contribution limit. Once April 15th goes past you won’t be able to go back in time to then contribute again. Even if you don’t think you will max out your contribution limit this year because you are just getting started, it is much better to put all the money you can now toward last year. You’ll have another full year from April 16th to the following April 15th to maximize your contributions for this tax year.

Can I Contribute to a Traditional IRA Late?

The Internal Revenue Service has the same rules for both Traditional IRAs and Roth IRAs. That means you can still contribute for a 2011 Traditional IRA until April 15th of this year.

Starting a Late Traditional or Roth IRA

Even if you haven’t opened an account with a brokerage firm to hold a Traditional IRA or Roth IRA, you can still do so until the April 15th deadline. You will need to decide which account works better for you. Every situation is different, but there are some general rules of thumb to help you make your decision:

Pick a Traditional IRA if…

  • You expect your tax bracket to decrease in retirement. If you are in the 33% tax bracket today, but anticipate being able to drop your income down enough during retirement to only be in the 25% tax bracket, you should use a Traditional IRA. You’ll avoid paying 33% tax today and pay 25% tax in the future, saving 8% in tax alone.
  • You want a tax deduction. Sometimes you just want to drop your tax owed down. With a Traditional IRA you get a tax deduction today, so contributing a full $5,000 could save you $1,250 if you’re in the 25% tax bracket.

Pick a Roth IRA if…

  • You expect your tax bracket to be higher in retirement. If you are in a low tax bracket (25% or below), but expect to sock aside enough money for retirement that you’ll be in a higher tax bracket despite no longer working, you need a Roth IRA. You’ll pay the lower tax now and never pay tax on your nest egg again.
  • You think tax rates will increase over time. Alternatively, even if you in a higher tax bracket, if you anticipate income taxes going up to make up for the trillions of national debt we have, you might want to use a Roth IRA to avoid that higher tax in the future.

Do both…

  • You don’t want to commit to one strategy. If you aren’t sure which way tax brackets will go or whether or not you’ll be in a different bracket in the future, you can just use both types of accounts. You can’t contribute $5,000 to both accounts ($10,000 total), but you could contribute $2,500 into each. This doesn’t put you “all in” on one strategy where being wrong could cost you a lot of money. You’ll be right (or wrong, depending on how you look at it) by splitting your contributions into both accounts.

{ 2 comments… read them below or add one }

Britt January 16, 2012 at 1:52 pm

Actually, you have until April 17th to open a Roth IRA this year.

Normally, the deadline to open a Roth IRA is the same as the deadline to file a tax return (April 15th). But this year, according to the IRS, “taxpayers will have until Tuesday, April 17, to file their 2011 tax returns and pay any tax due because April 15 falls on a Sunday, and Emancipation Day, a holiday observed in the District of Columbia, falls this year on Monday, April 16. According to federal law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do; therefore, all taxpayers will have two extra days to file this year.”

As a result, you can make Roth IRA contributions for the 2011 tax year up until midnight on Tuesday April 17th, 2012.

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Pravin June 13, 2012 at 1:18 pm

I stated that i would make a ROTH contribution in my return, but forgot to make the contribution. What should i do? Should i refile an ammended return for this?

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