If you’re worried you missed out on the opportunity to contribute to an individual retirement account (IRA) for last year, then you might be in luck. With a carryback contribution, you can still contribute to the prior year’s IRA until you file that year’s taxes.
Here’s what you should know about carryback contributions and the potential benefits of doing so.
Am I eligible to make a contribution to last year’s IRA limit?
You can make contributions that count toward a previous year’s IRA as long as you earned taxable income in that tax year. You can contribute up to the IRS limit for IRAs or your taxable compensation for the year if it’s below the limit. Basically, that means you can’t contribute more to your IRA than what you’ve earned in a given tax year.
What is the benefit of making a carryback contribution?
The benefit of contributing to a prior year’s IRA is simply to not miss out on any remaining tax advantages. If you didn’t max out your IRA last year, a carryback contribution makes it possible for you to benefit from last year’s tax advantages before dipping into this year’s.
When may a carryback contribution make sense?
Carryback contributions give you more flexibility to make the most of your retirement savings strategy. There are several reasons you might wish to consider making a carryback contribution.
For instance, if you didn’t meet your total allowable contribution yet, then contributing to last year’s limit might make sense. Or if you simply never got around to making any IRA contributions and don’t want to miss out on a year’s worth of tax breaks, you can still invest that money via an IRA and reflect that in the year’s tax filing.
How much can I contribute to an IRA if I have a 401(k)?
Although anyone contributing to a 401(k) may also contribute to an IRA for the same year, depending on your income, you may not be able to claim all of those contributions as a tax deduction when filing.
If you’re already contributing to a 401(k) through your employer for a given year, income levels may limit the amount you can claim as a deduction on your taxes. The income limits vary by tax filing status from a full deduction, partial deduction, or no deduction at all. The IRS may change these income limits each year alongside updates to the contribution limits.
Even if you can’t claim the contribution as a tax deduction, there can still be benefits to making contributions to an IRA if you can financially do so. Compounding interest in a tax-advantaged account, like an IRA, can grow to a meaningful amount by retirement.
What if I don’t have an IRA already?
If you don’t currently have an IRA but want to make carryback contributions, you can open and fund your IRA for the previous year any time before tax day. The IRA does not need to be opened by the end of the year in which you’d like to make the contributions.
How do I contribute to last year’s IRA limit in my Guideline account?
You can find step-by-step instructions for making carryback contributions to your Guideline traditional or Roth IRA here.
The information contained in this article is general in nature and based on authorities that are subject to change. This article is not intended to provide investment advice, legal, tax or accounting advice, and readers should always consult an accountant or tax advisors concerning the application of tax laws to their particular situations.