It’s that time of year again. The holidays are over and Punxsutawney Phil is promising an early spring, but before that we’re still in the thick of tax season! While tax season usually conjures images of 1040s, W-2s, and sifting through piles of receipts, it’s also an important time if you contribute to an IRA or are considering doing so. Here are 5 things to think about before filing your taxes:
1. It’s not too late to make a contribution for 2015. IRA contributions can be made until April 18, 2016. Nonworking spouses are also eligible to make contributions as long as one spouse has earned income for the year and the total IRA contributions of both spouses don’t exceed the income reported on the joint return. What’s more, if one spouse (or both) is not covered by an employer-sponsored retirement plan, the income limits for deductibility of traditional IRA contributions may be significantly higher than the standard limits. This can make contributing to a traditional IRA more attractive to higher-income families with only one working spouse.
Speaking of higher-income earners, if you’d like to contribute to a Roth IRA but make too much, you may have some options. You could consider making a traditional IRA contribution and later converting it to a Roth IRA (a strategy often called a “backdoor” Roth IRA). In addition, there’s no income limit for nondeductible contributions to a traditional IRA. Although you don’t get to deduct these contributions, the earnings grow tax-deferred until withdrawn.
2. Don’t forget to catch up. For 2015 and 2016, the contribution limit is $5,500 for individuals under age 50. If you’re 50 years of age or older, however, you’re allowed to make a “catch up” contribution of an additional $1,000, for a total of $6,500 per person. So, a married couple, both of whom are over age 50 and eligible to contribute, could make combined contributions of $13,000.
3. Consider making a double contribution. If you haven’t made your 2015 IRA contribution yet, consider making both your 2015 and 2016 contributions now. Although you might not think that the timing of your contribution matters, the compounded effect of late contributions can make a significant difference over time. Take the example of two investors who both contribute $5,500 a year to their IRAs. Investor A makes her contribution January 1 of every year; Investor B makes his contribution on April 1 of the following year. Just by making her contribution earlier, Investor A could potentially end up with over $15,000 more than Investor B based on the hypothetical illustration below. In a sense, this $15,000 is like “free money” for Investor A—both investors contribute the same amount, but Investor A retires with more.
Editor’s Note: This hypothetical example is provided for the purposes of illustration only. All figures are in today’s dollars. “Early bird” contributes January 1 of the tax year; “last minute” contributes April 1 of the following year. This example assumes each investor contributes $5,500 for 30 years and earns 4% annually after inflation. Projected balances are as of April of the ending year, when the procrastination investor makes the final contribution.
4. Contribute your tax refund. Continuing the theme of “free money,” if you’re receiving a tax refund, consider using part or all of it to make a 2015 IRA contribution. For most people, their tax refund check is money they haven’t budgeted for. Because it’s essentially “found money” and not needed to pay bills or living expenses, it’s a relatively painless way of funding your IRA. The IRS even makes it easy by allowing you to have some or all of your tax refund sent directly to your IRA custodian. What’s more, you don’t have to make the contribution before you file your taxes! You can file your taxes, get your refund, and then make your contribution, as long as you make the contribution by April 18!
5. Don’t park it in a money market account. Often, we see last-minute filers park their contribution in a money market account until they can go back to invest later. The problem is that many don’t go back. Take a page out of the employer-sponsor playbook and pick a balanced fund or target-date fund as a default. That way you’re fully invested and diversified from the start.
While taxes are top of mind for most investors this time of year, it’s also an important time to think about your IRA. By following these five simple steps, you can help put yourself on the right track for retirement—and maybe lower your tax bill as well.
Interested in more tips to help maximize your IRA? Check out Vanguard’s IRA Insights research series!
 In order to qualify, the contribution must be made (or postmarked, if mailed) no later than the tax filing deadline, without extensions. Remember to specifically designate it as a 2015 contribution—otherwise, it will be counted as a contribution in the year it is received (2016).
Special acknowledgements to Garrett Harbron for his contributions to this blog post.
All investing is subject to risk, including the possible loss of the money you invest.
When taking withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.
We recommend that you consult a tax or financial advisor about your individual situation.