With over 65 million IRAs and approximately $13 trillion of IRA funds, most American’s savings are in IRAs. The reason that saving through an IRA is so popular is because the IRA regime is based on two very important tax principles: (i) tax deductions and (ii) tax deferral. With a pre-tax IRA, one will receive an income tax deduction for making an IRA contribution (a Roth IRA is an after-tax IRA). Additionally, all income and gains earned in an IRA will generally flow back to the IRA without tax.
Types of IRAS
The most common types of IRAs are Traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. In 2024, the maximum Traditional IRA and Roth IRA contribution amounts are $7,000 or $8,000 if at least the age of 50. Those numbers have increased from $6,500 and $7,500 respectively in 2023. The SEP IRA maximum contribution amount is $69,000 for 2024 and $66,000 in 2023, and the SIMPLE IRA maximum contribution amount is $16,000 with a $3,500 catch-up if at least age 50 for 2024. In 2023, the SIMPLE IRA contribution limit increases to $15,500 and $19,000 is age 50 or older.
This article will explore the deadline for making contributions to an IRA for the 2023 taxable year in 2024.
Traditional IRA
In general, if you have income from working for yourself or someone else (earned income), you may establish and contribute to an IRA. For 2024, one may contribute a maximum of $7,000 each year or $8,000 if one reaches the age of 50 by the end of the year (with a $500 increase from 2023). If you are not covered by an employer’s retirement plan, you may take a deduction on your tax return for your contribution. However, if you are covered by an employer’s plan, your IRA may be fully deductible, partly deductible, or not deductible at all depending on how much gross income you have. Contributions to a Traditional IRA are generally tax deductible and subject to the required minimum distribution rules at age 73. All traditional IRA contributions for the 2023 taxable year must be made by April 15, 2024. Even if you file an income tax return extension, the IRA contribution for 2023 must be made by April 15, 2024.
Below are the income thresholds for making pre-tax IRA contributions for 2023:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to between $73,000 and $83,000.
- For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is between $116,000 and $136,000.
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is between $218,000 and $228,000.
Related: Alternative Investments in an IRA
Roth IRA
The Taxpayer Relief Act of 1997 introduced the Roth IRA. The Roth IRA is an after-tax IRA that allows any United States person with earned income under a set income threshold (under $153,000 if single and $228,000 if married and filing jointly) to make after-tax contributions up to $6,500 or $7,500 if over the age of 50 in 2023. So long as the Roth IRA has been opened at least 5 years and the Roth IRA has been opened at least 5 years, all Roth IRA distributions would be tax-free. Also, with a Roth IRA, there are no required minimum distributions.
For the 2023 taxable year, Roth IRA contributions must be made by April 15, 2024. Even if you file an income tax return extension, the IRA contribution for 2023 must be made by April 15, 2024.
Since 2010 the IRS removed any income restrictions for making Roth conversions. Hence, in 2023, anyone can make a Roth IRA contribution either directly or via a backdoor Roth IRA irrespective of income. Although Roth IRA contributions are not tax deductible, the opportunity to shelter all future Roth IRA gains from tax is super tax advantageous.
SEP IRA
A Simplified Employee Pension (SEP) is a special type of IRA that can be established by your employer or by you if you are self-employed. Designed for small businesses, SEPs have many of the characteristics of qualified plans but are much simpler to establish and administer. For 2024, the maximum SEP IRA contribution is $69,000 (increasing from $66,000 in 2023). Contributions to a SEP are deductible and subject to the required minimum distribution (RMD) rules. However, starting in 2023, profit-sharing contributions to a Roth IRA can also be made in Roth. The SEP-IRA Roth contributions would be tax-deductible to the business and subject to tax by the employee recipient.
A SEP IRA is a pure profit-sharing plan. The percentage of SEP IRA contributions to be used to determine the amount of SEP IRA contributions for the year is based on the type of entity that has established the plan. For example, a sole proprietor and single-member LLC would be permitted to make a maximum 20% SEP IRA profit-sharing contribution based on the plan participant’s net Schedule C income. Whereas, a corporation (C or S) or a partnership would be able to make a 25% employer profit sharing contribution based off the plan participant’s W-2.
For example, if a sole proprietor warns $100,000 of net schedule C income in 2023, the business would be able to make an employer profit-sharing contribution amount of $20,000. The contribution can be made in pre-tax or Roth.
The deadline for making SEP IRA contributions for 2023 is dependent on the type of entity that has established the SEP IRA. Below is a breakdown of the SEP IRA entity contribution deadline rules for 2023, irrespective of when the SEP IRA was established:
- Sole proprietorship: April 15, 2024, or October 15, 2024, if an extension is filed for Form 1040.
- Single-Member LLC: April 15, 2024, or October 15, 2024, if an extension is filed for Form 1040.
- Multiple-Member LLC: March 15, 2024, or September 15, 2024, if an extension is filed for Form 1065.
- C Corporation: April 15, 2024, or October 15, 2024, if an extension is filed for Form 1120.
- S Corporation: March 15, 2024, or September 15, 2024, if an extension is filed for Form 1120S.
Related: SEP IRA vs. Solo 401(k)
Simple IRA
Simplified Incentive Match Plan for Employees, or SIMPLE IRA, is designed to make it easier for small employers (those with 100 or fewer employees) to establish a retirement plan. A SIMPLE IRA, like a 401(k), allows employees to divert some amounts of compensation into retirement savings. As with a SEP, contributions to a SIMPLE IRA are deposited into a separate IRA for each participating employee. The participant may select any percentage of compensation to defer into the plan – even zero – but the total dollar amount cannot exceed $16,000 in 2024 ($19,500 if you are at least age 50 by the end of the year) or $15,500 and $19,000 if age 50+ for 2023.
The deadline for setting up a SIMPLE for 2023 was October 1, 2023. SIMPLE IRA contributions can be made in pre-tax or Roth. Contributions to a SIMPLE IRA must be made by 30 days from the end of the 2023 taxable year.
Conclusion
Depending on the type of IRA contribution you are considering, there could still be an opportunity to make IRA contributions for the 2023 taxable year. It is never too late to save for retirement. This is because the retirement system is based on the power of tax deferral. Tax deferral is when all gains generated by a pre-tax retirement account investment flow back into the retirement account tax-free. This allows your retirement funds to grow at a much faster pace than if the funds were held personally, allowing you to build for your retirement more quickly. This is also known as compounding interest, which Albert Einstein coined the 8th wonder of the world.
