Saving on your taxes while boosting your retirement savings? Sounds like a win-win. If you missed contributing to an IRA last year, there’s good news—you may still be eligible to make a deductible IRA contribution for the previous tax year. But you’ll need to act fast because the clock is ticking.
This blog walks you through everything you need to know about retroactive IRA contributions, how to maximize your tax savings, and what steps to take to ensure you're fully compliant with IRS regulations.
What Is an IRA Deduction?
An IRA deduction refers to the amount you can deduct from your taxable income for contributions made to a traditional IRA within the specified limits. The purpose? To incentivize people to save for retirement while reducing their current tax burden. The deduction is available for individuals who meet specific income and participation criteria, as set by the IRS.
Here’s the kicker—you don’t need to have made the contribution last year to qualify for last year’s deduction. Provided you meet IRS deadlines, you can make that contribution up until the tax filing deadline (usually April 15) and still claim it for the previous year.
Why Does This Matter?
- Tax Savings: Lower taxable income means lower taxes owed.
- Retirement Readiness: Max out contribution limits and grow your retirement nest egg.
- Catch-Up Opportunities: If you couldn’t contribute last year due to cash flow or other reasons, retroactive contributions bring you back on track.
How to Check If You’re Eligible for a Retroactive IRA Contribution
Before making a deductible IRA contribution for the prior year, ensure that you meet the eligibility requirements. Here’s a quick checklist to guide you.
1. Age Restrictions
Good news—since the SECURE Act of 2019 came into effect, there is no age limit for contributing to a traditional IRA. Whether you're 25 or 75, you're eligible to contribute as long as you have earned income.
2. Earned Income Requirement
You must have earned income from wages, salaries, commissions, or self-employment income to qualify for an IRA deduction. Unearned income, like dividends or rental income, won’t count.
3. Income Limits
Your eligibility might be affected if you're covered by a retirement plan at work, as the IRA deduction phases out at higher income levels. For contributions made for the 2024 tax year, here’s how the phase-out works:
- Single Filers: $68,000–$78,000
- Married Filing Jointly (spouse covered): $109,000–$129,000
- Married Filing Jointly (spouse not covered): $204,000–$214,000
Keep these limits in mind to figure out if you qualify for a full, partial, or no deduction.
4. Contribution Limits
The total amount you can contribute to an IRA for any given year (2024 included) is $6,000 ($7,000 if you’re 50 or older), subject to earned income.
How to Make a Deductible IRA Contribution for Last Year
Taking advantage of this opportunity might sound complicated, but it’s easier than you think. Here’s a step-by-step guide to get you started.
Step 1: Verify the Deadline
The deadline for retroactive IRA contributions aligns with the federal tax filing deadline, typically April 15. For contributions tied to the 2024 tax year, ensure your contribution is made by April 18, 2025 (since Tax Day falls on a Tuesday this year).
Pro tip: Even if you file for a tax extension, the contribution deadline for prior-year contributions remains firm—April 18 in this case.
Step 2: Choose Your IRA Account
If you already have a traditional IRA, confirm that it is eligible for tax-deductible contributions. If not, you may first need to open an account with a financial institution that offers IRAs.
Check brokerage options like Fidelity, Vanguard, or TD Ameritrade for affordable, reliable options to open an IRA.
Step 3: Make the Designation Clear
When making your payment deposit or contribution, make a clear written designation that the funds are for last year’s tax year (e.g., 2024). Inform your IRA custodian about this detail to avoid confusion.
Step 4: Keep Detailed Records
Document your contribution details thoroughly. Keep receipts, account statements, and confirmation of the tax year designation for your records. This information will be critical when preparing your taxes.
The Benefits of Acting Now
Procrastinating on retirement savings is common, but taking advantage of retroactive IRA contributions can undo past delays. Here’s why acting NOW is so crucial:
- Immediate Tax Deduction: Reduce your taxable income for the prior year, potentially moving you to a lower tax bracket.
- Compound Interest Advantage: Every day your funds are invested is another day your earnings compound. Even small contributions add up significantly over time.
- Avoid Missing Opportunities: Once the April deadline passes, the previous year's contribution window closes for good.
FAQs About Deductible IRA Contributions
Q. Can I contribute to a Roth IRA instead of a traditional IRA?
A. Roth IRAs work differently—contributions are made with after-tax dollars and don’t qualify for deductions. However, the tax-free growth and withdrawals for Roth IRAs make them incredibly attractive for long-term planning.
Q. Does my IRA deduction phase out if I have multiple sources of income?
A. Possibly. The phase-out depends primarily on your adjusted gross income (AGI) and whether you or your spouse are covered by a retirement plan.
Q. Can I schedule automated contributions for easier management?
A. Absolutely. Many institutions allow you to set automated monthly contributions to maintain consistent savings habits without the hassle of manual management.
Why IRA Deductions Are a Game-Changer
Maximizing your IRA contributions and deductions isn’t just about saving for retirement—it’s a smart tax strategy that grows your wealth over time. By leveraging IRS rules that allow retroactive contributions, you can make up for lost time and give your future self a financial advantage.
At SD Mayer & Associates, we specialize in strategies like this to ensure our clients maximize their financial opportunities while staying compliant. If you’d like help calculating your deduction, understanding tax implications, or even opening an IRA, our team of experts is just a click away.
Your next step? Don’t wait. Contribute to your IRA today, claim your deduction for last year, and invest in the future you deserve.
SECURITIES AND ADVISORY DISCLOSURE:
Securities offered through Valmark Securities, Inc. Member FINRA, SIPC. Fee based planning offered through SDM Advisors, LLC. Third party money management offered through Valmark Advisers, Inc a SEC registered investment advisor. 130 Springside Drive, Suite 300, Akron, Ohio 44333-2431. 1-800-765-5201. SDM Advisors, LLC is a separate entity from Valmark Securities Inc. and Valmark Advisers, Inc. Form CRS Link
DISCLAIMER:
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The services of an appropriate professional should be sought regarding your individual situation.
HYPOTHETICAL DISCLOSURE:
The examples given are hypothetical and for illustrative purposes only.
