Thinking About Contributing to a Roth IRA Before Tax Day? Here’s Why You Should

We’re a few days away from this year’s tax deadline on July 15th. It’s also the deadline to make contributions to an IRA for 2019. Contributing to a Roth IRA can be particularly beneficial.

You don’t have to make changes to your tax return

Unlike an HSA and possibly a traditional IRA, Roth contributions aren’t tax-deductible, so they won’t alter your tax return if you’ve already filed it for 2019. Just be sure the contributions are coded as 2019 rather than 2020 contributions.

You still have access to your contributions

Unlike HSAs and traditional IRAs, you can withdraw the sum of your Roth IRA contributions at any time and for any purpose without tax or penalty. That means if you have some money sitting in a savings account for emergencies, you might as well put it in a Roth IRA since you can still access the contributions if you need to.

You would just need to fill out a withdrawal form, which can actually discourage you from spending the money frivolously. Be aware that if you withdraw any earnings, they may be subject to taxes plus a 10% penalty if you’re under age 59½ or haven’t had the account open for at least 5 years, but all the contributions come out first. If your Roth IRA is in cash, there probably won’t be much in earnings anyway given today’s low interest rates.

You have a lot of investment flexibility

Unlike your employer’s retirement plan, you’re not limited to a fixed number of investment options. You can generally open a Roth IRA at your favorite financial institution and invest it in everything from an FDIC-insured savings account to individual stocks. In a self-directed Roth IRA, you can even invest in gold bullion, direct real estate, and a small business.

You can use the earnings tax-free for a down payment on a home

In addition to withdrawing the contributions tax and penalty-free, you can also withdraw up to $10k of earnings penalty-free towards a home purchase as long as you haven’t owned a principal residence in the last 2 years. If you’ve had the Roth IRA for 5 years, those earnings would also be tax-free.

Your money can grow to be tax-free for retirement

Speaking of retirement, the main benefit of a Roth IRA is that any earnings you don’t withdraw will eventually be tax-free as long as you’ve had the account for at least 5 years and are over age 59 1/2. This can help you avoid higher tax brackets.

For example, taxable income up to $80,250 for a married couple filing a joint return is currently taxed at 12% or less (based on 2020 tables). Any income over that amount will be taxed at 22% or more. If a retired couple has $90k of taxable income, they could reduce it to the $80,250 limit by dipping into their tax-free Roth IRA(s) for the remaining $9,750 of income and avoid moving into the 22% marginal tax bracket. This would be even more beneficial if tax rates go up in the future.

The earlier you contribute, the longer your money can grow to be potentially-tax free and the longer you’ll enjoy these other benefits as well. So if you haven’t contributed to a Roth IRA for 2019, you have about a few days left. What are you waiting for?