Should You Make a Current or Prior-Year IRA Contribution?

Contributing to your IRA helps you be better prepared for your future, and if you're using a traditional IRA, you can also score a tax break today. Most of the time, making an IRA contribution is pretty straightforward, but right now, it's a little more complex.

Up until April 18, 2022, you can either make a current-year IRA contribution or a prior-year contribution. Which one is right for you? Here's what you need to know to decide.

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How prior-year IRA contributions work

Prior-year IRA contributions are applied to the previous year — in this case, 2021. You're allowed to make them up until the tax filing deadline, which is April 18, 2022.

Making a prior-year contribution is similar to making a current-year contribution. You decide how much you'd like to contribute and deposit the funds, and they're invested just like the rest of your money. But if your IRA provider doesn't ask you which year to apply the contribution to, follow up with them to make sure they apply your contribution to the correct year. Otherwise, they may default to a 2022 contribution.

Once you've made your prior-year contribution, you can write this amount off on your 2021 taxes. If you choose to make a current-year contribution instead, you must wait until next year to write it off.

Which is better: a current or prior-year contribution?

There are two key factors to consider when deciding between a current and prior-year IRA contribution:

How much you plan to contribute to your IRA in the year ahead.
Your taxable income in 2021 and 2022.

You're only allowed to contribute up to $6,000 to an IRA in 2021 and 2022, or $7,000 if you're 50 or older. If you've already hit that limit for 2021, you should stick to a 2022 contribution. Otherwise, you'll face penalties for overcontributions.

But if you haven't maxed out your IRA contributions for 2021, you might consider a prior-year contribution. Or you could split your savings and apply some to each year if you'd like.

Those contributing to a Roth IRA won't notice any difference to their taxes, no matter which year they apply the contribution to, because Roth IRA contributions don't give you a tax break this year. Traditional IRA contributions, on the other hand, give you an upfront tax break in exchange for you paying taxes on your withdrawals later.

If you're planning a traditional IRA contribution, think about when it will be of the greatest benefit for you. If you're at the lower end of your 2021 tax bracket, it might make sense to do a prior-year contribution. This will reduce your 2021 taxable income and may knock you down a tax bracket, meaning you'll lose a smaller percentage of your savings to the government. But if you think you'll earn more this year, you might want to save the tax break for your 2022 taxes.

It's up to you to decide which is best, but if you're planning a prior-year contribution, you should do this before filing your taxes. If you've already submitted your tax return and then decide to make a prior-year contribution, you'll have to file an amended tax return to avoid problems with the IRS. And no one wants to do their taxes twice.

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