WASHINGTON — Tax Day. For some that means pulling out the checkbook to settle up. But others might be angling their money toward individual retirement accounts.
That is partly because of human nature — April 15 is the deadline for paying taxes and for making IRA contributions for 2014. “People do tend to procrastinate, and there’s nothing like a hard deadline to get you motivated and to take some action,” says Ken Hevert of Fidelity Investments.
But some people wait until now to make the contribution because they don’t feel confident that they can afford it or that it will lower their tax bill until they’ve prepared their tax returns, financial advisers say. “People like to see where they stand,” Hevert says.
Making a last-minute contribution to an IRA can have major tax benefits. Some people making contributions to a traditional IRA qualify for a deduction, which would lower this year’s tax bill. Savings would also grow tax-free until the money is withdrawn in retirement. People who cash in early, however, would have to pay early-withdrawal penalties as well as taxes.
Contributions are fully deductible for people who don’t have access to a workplace savings plan such as a 401(k). But people who qualify for a workplace plan see their deductions phased out if they earn above a certain amount. For 2014 returns, the tax break is eliminated for single people making more than $70,000 and for married couples making more than $116,000. The limit goes up to $191,000 if only one spouse is covered by a workplace plan.
Taxpayers can generally contribute up to $5,500 a year into a traditional IRA or a Roth IRA, which is funded with after-tax dollars, though that limit is increased to $6,500 for people who are at least 50 years old. (Contributions to Roth IRAs are not tax deductible.)
To get more out of the account, workers can make IRA contributions for last year and this year at the same time, says Dan Keady, director of financial planning for TIAA-CREF. Contributions need to be made or postmarked by April 15 to count for 2014.
Those who can’t make a lump-sum payment can set up for smaller contributions to be automatically withdrawn from their paychecks, says Lena Haas, senior vice president of retirement for E*Trade. Think of it this way: The $5,500 annual contribution comes out to a little more than $100 a week. “It’s a lot more tangible number for people to think about,” she says.