We’re coming up on the deadline for one of the biggest annual investment deals in America. April 17th is the last day to contribute to IRA accounts for the 2017 tax year. Maxing out the contribution limit for your IRA is a no-brainer. Why? In part because anyone who doesn’t put as much as possible into his or her IRA is giving the government lots of money for taxes that they don’t need to.
And yet, that's exactly what most of us do. According to a 2016 survey commissioned by the financial services firm TIAA, roughly 33% of American adults have opened an IRA, and only 18% regularly contribute to them. So more than 80% of us are totally forgoing the amazing tax savings that IRA contributions offer.
How They Work
The government wants its citizens to save money for retirement. And to incentivize us, it essentially pays us to save money in an IRA. This isn’t simply because the government loves us so much it wants to give us a once-a-year cash bath. It’s because they’ve run the numbers and realized it’s far cheaper to give up some tax revenue now than it is to take care of us when we’re old and expensive to repair.
First things first: what’s an IRA? IRA stands for Individual Retirement Account — “individual” refers to the important fact that unlike 401(k)s, which are only available through your employer, IRAs are opened and administered by individual humans just like yourself. Each year you can contribute up to $5,500 (or $6,500 if you’re older than 50) into an IRA and, as a thank you for tucking these funds away until you’re 59 1/2, Uncle Sam gives you a break on your taxes. Exactly when you benefit from these tax breaks all depend on whether you fund a Traditional or a Roth IRA.
A Traditional IRA is the most popular because literally any American between 18 and 70 with a pulse can open one. Here’s how its particular savings mojo works: every dollar you deposit lowers your taxes today. A hypothetical person who earns $75,000 but contributes the full $5,500 only pays taxes on $69,500. You will only have to be taxed on those contributions when you withdraw the funds in retirement. And in the meantime you will be using that extra money to make more money.
Roth IRAs offer a different kind of tax benefit. Although any money you contribute to a Roth will be considered taxable income now, you won’t have to pay any taxes when you withdraw it after you’re 59 ½, like you would with a Traditional IRA. While traditional IRAs are open to everyone, Roth IRAs are only available to those whose salary is below a specific income level — folks fortunate enough to earn more than $133,000 are ineligible. You can calculate exactly how much you’re permitted to contribute here. Roth IRAs are especially advantageous to those who anticipate that their income in retirement will exceed what they currently earn. Then it's better to pay taxes on income now than later when your tax rate will be higher.
SEP IRAs are specifically designed for, and only available to, the self-employed and small businesses. Because those folks don't have access to company 401(k)s, the pretax contribution limits are much higher than for traditional IRAs. For 2017, individuals can contribute up to 25% of their income, or $54,000, whichever number is smaller.
Keeping Track of How Much Room You've Got Left is Hard. So We Built a Tracker
So yes, max out your contributions — but don't put in a penny over that, since any amount deposited over that limit will be assessed a 6% annual penalty. Knowing how close you are to the limit is important. Thankfully, all you'll need is our new IRA tracker. To enjoy this feature you have to do…. literally nothing. If you’ve got an IRA with us, we’ll keep track of every deposit you make so you can see exactly how much contribution room you’ve got left. Just log into your account, click on your IRA page, and you’ll see the tracker on the left hand side of the page. And if you're confused (we get it, it can be confusing!) we’re here to help at email@example.com. Don’t hesitate to reach out.
A few last-minute tips:
1) The easiest, most cost-effective way to take advantage of this moment is to open an IRA account at Wealthsimple. Start here.
2) When you get that tax refund, invest it!
3) Going forward, it's best not to wait until the last minute. If you have cash on hand, invest at the beginning of the year. Or set up a monthly contribution and let us do it for you.