Maximize your savings potential in the new year with this tax-smart strategy

This paid piece is sponsored by the First National Bank in Sioux Falls.

We all know we have until mid-April every year to file our individual income tax returns, but did you know you also have until Tax Day to make a contribution to your IRA account and consider it being made last year?

What are IRAs?

The two most common types of individual retirement accounts are a traditional IRA and a Roth IRA. Both are retirement planning vehicles, and both have contribution limits of $6,500 for 2023, or $7,500 if you are 50 or older.

The main differences between the two stem from the way contributions and withdrawals are taxed.

Contributions to a traditional IRA are partially or completely tax-deductible if your income is under certain limits, and withdrawals are taxed; on the other hand, contributions to a Roth IRA are made with income that already has been taxed, but withdrawals are not taxed — subject to a few exceptions.

There also are income limits when contributing to a Roth IRA — but high earners can get around those limits by opening a “backdoor Roth IRA.” For help with planning strategies, reach out to the team at First National Wealth Management.

Because there are benefits to both traditional IRAs and Roth IRAs, you might find it advantageous to have both types of accounts, depending on your financial situation and goals.

This can be a powerful strategy when it comes to saving for retirement because it allows you to spread your savings across pre-tax and post-tax accounts, and it will give you more flexibility during this tax year and future ones.

What is a prior-year contribution, and how would it benefit me?

A prior-year contribution is a contribution you make in any given year that is considered as having been made in the previous tax year.

In other words, you have until April 15, 2024, to make a contribution to your IRA and still consider it to be a contribution made in 2023.

There are a few reasons why this may be a smart strategy for you to consider.

First, if you complete a draft of your tax return and realize you’d like to reduce your taxable income, you could make a prior-year contribution to a traditional IRA to achieve that goal.

Also, if you missed your opportunity to make a contribution in the last tax year, making a prior-year contribution would give you an extra year to stash money away for retirement and maximize investment growth when you otherwise would have lost that opportunity.

Do I qualify to make a prior-year contribution?

Anyone can make a prior-year contribution if they have not already contributed the maximum allowed in that tax year.

The IRA contribution limit is $6,500 for tax year 2023 and $7,000 for tax year 2024, with an additional $1,000 catch-up contribution available for people who are 50 or older.

It is important to note that you cannot contribute more than the limit in total across any of your IRAs in a given year, regardless of whether they are traditional or Roth.

What else should I know?

If you decide to make this type of contribution, make sure the financial institution administering your account accurately codes the contribution as being made in the previous year.

Also, remember that you need to have earned income in 2023 — as an employee or through self-employment — at least equal to your contribution amount to make an IRA contribution.

If you plan to make a prior-year contribution to a traditional IRA, wait to file your tax return until you’ve made the contribution or at least until you know how much you will contribute.

But don’t worry if you’ve already filed before making a contribution; the option remains to file an amended return so you can take advantage of the decrease in your taxable income.

If you have questions or would like more information on making a prior-year contribution or opening an IRA account, send the experts at First National Wealth Management a note. They’d be happy to help with any of your IRA needs!

Any comments, insights or strategies discussed in this article are intended to be general in nature and, therefore, may not be suitable for you and your situation, whatever that may be. Before acting on anything written here, please consult with your attorney, CPA and/or your financial advisor.