Last Minute Retirement Planning Before Tax Day
Although it’s already March 2023, there is still time to make last-minute retirement plan contributions for 2022 that could potentially lower your tax bill today or in the future. While most tax-savings contributions have to be completed within the calendar year (December 31st) to count for the tax year, contributions to certain retirement accounts such as Traditional IRAs, Roth IRAs, HSAs and SEP IRAs can be completed before Tax Day, which is April 18th 2023.
INDIVIDUAL RETIREMENT ACCOUNTS (IRAs)
The annual contribution limit for 2022 for IRAs is $6,000 if you’re under the age of 50 and, if you’re over 50, you’re allowed an additional $1,000 contribution to total $7,000.
You can fully deduct the contribution to a traditional IRA if neither you nor your spouse is covered by a retirement plan at work. If only one spouse has a workplace plan, the other can get a full deduction for IRA contributions if their joint income is $204,000 or less. A single taxpayer with a workplace plan gets a full deduction with an adjusted gross income of $68,000 or less.
For Traditional IRAs, there are no income limitations to contribute, but for Roth IRAs there are different limitations for different tax filers.
For tax year 2022, Roth IRA contributions start to become limited for most single filers begin at $129,000 of adjusted gross income (AGI) and $204,000 for most married joint filers. Before you make a Roth IRA contribution, please confirm your income with your Wealth Advisor so you can avoid future headaches and/or IRS penalties with over contributing.
Roth IRA contributions aren’t deductible and anyone with earned income can open an IRA. Pensions, Annuities, Unemployment or worker’s compensation, or Social Security are not considered sources of earned income.
Taxpayers who earn too much to make contributions directly to a Roth IRA can still do so via a two-step process known as a “backdoor Roth”. First, you open and contribute to a traditional nondeductible IRA. Then, you open a Roth IRA and immediately transfer the traditional IRA money into a Roth IRA. You’d normally pay any income tax on the IRA earnings when making the transfer, but there should be little to no earnings if you do it quickly and then you’ll have the funds growing tax-free in a Roth IRA.
While the backdoor Roth IRA sounds straightforward (because it is), the tax implications can become a bit more complicated if you have other IRAs funded on a pre-tax basis so you should check with your Wealth Advisor to confirm the rules before proceeding.
For taxpayers with self-employment income, the contribution limit for SEP-IRAs is $61,000 for tax year 2022. In many cases, savers can make contributions for 2022 until Oct. 16, 2023, if they have requested an extension to file their returns. Business owners may put money back into their businesses, which is great for growing the business but neglects savings for themselves.
HEALTH SAVINGS ACCOUNTS
The HSA (Health Savings Account) contribution limits for 2022 are $3,650 for self-only coverage and $7,300 for family coverage. Those 55 and older can contribute an additional $1,000 as a catch-up contribution. You have until the tax filing deadline. April 18, 2023, to contribute to an HAS for 2022. To contribute to an HSA, you must be enrolled in an HSA-eligible health plan. For 2022, this means 1) it has an annual deductible of at least $1,400 for self-only coverage and $2,800 for family coverage and 2) its out-of-pocket maximum does not exceed $7,050 for self-only coverage and $14,100 for family coverage.
HSAs offer triple tax benefits in that you get a deduction for your contribution, your contributions grow tax-deferred, and you can make withdrawals on a tax-free basis for qualified medical expenses, which means that it’s a great vehicle for retirement planning.
If you’d like to make any last minute contributions to any of the above accounts or set yourself up for a successful 2023 tax year, please reach out to your Wealth Advisor.
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