The Pros and Cons of Contributing More to Your IRA Before Mid-July

Did you know that Individual Retirement Accounts are outstanding tools for a broad range of Americans to prepare for their post-working years? They are not, however, without drawbacks. Understanding the pros and cons of these popular investments can help account holders decide whether to contribute more during this year’s extended deadline.

Due to the COVID-19 crisis, the Internal Revenue Service has delayed the 2019 federal income tax filing deadline by 90 days, or to Wednesday, July 15. The annual IRA contribution deadline tracks with Tax Day, and, as such, savers and investors were given an additional three months to maximize their allowable contributions. Whether they should is a separate question.

There are many benefits to an IRA. For instance, Traditional IRAs allow for long-term tax-deferred growth with the added benefit of short-term tax savings. So, the more money you put into an IRA, and the earlier you put it in, the greater the “snowball” effect over time. Now, consider that a person’s annual contributions, up to $6,000 for people under age 50 and $7,000 for those 50 and older, can be deducted from their annual taxable income total. It can be an attractive proposition for obvious reasons.

When combined with other benefits, such as certain bankruptcy protections and the ability to contribute to other concurrent retirement accounts, adding more money to an IRA before July 15^th seems like a no-brainer.

There are, however, potential downsides to consider. For example, offsetting short-term income taxes could be a costly mistake when considering that conventional IRA account holders will have to pay taxes when they withdraw money. If you are nervous about a large tax bill when you are older and may no longer be working, then you might want to explore a Roth IRA or a completely different retirement solution. Roth IRAs allow for tax-free withdrawals, but not annual contribution deductions. As far as the IRS is concerned, you either pay now or pay later. That decision is up to you.

Further, the IRS imposes a stiff penalty on early withdrawals, or those prior to age 59.5. It also mandates “required minimum distributions” after age 72, which not only forces taxable withdrawals, but also drains the investment from an inheritance perspective.

Other considerations also apply, such as whether a pre-July 15^th contribution can be better utilized in terms of an estate planning strategy. If you or someone you know would like more information or guidance concerning a related legal matter, our office is here to help. Contact us today to schedule a meeting.