Welcome to 2023, my military personal finance friends. There's so much to consider: a pay raise, new Basic Allowance for Housing (BAH) rates and changes to Tricare costs and fees. The start of a new year is a great time to increase your Thrift Savings Plan (TSP) and IRA contribution rates, because you won't feel the pinch when it happens at the same time as your pay raise. But there's another important thing that you need to consider as part of your overall financial plan: You can still make 2022 contributions to your individual retirement account (IRA) until April 18, 2023. Heck, even if you don't have an IRA, you can still open one and make contributions for last year.
Why Contribute for Last Year?
There are yearly contribution limits on tax-qualified retirement savings accounts. Making a contribution now, for 2022, means you have the full amount of your 2022 contribution limit and the full amount of your 2023 contribution limit available this year. Even if you think you won't be able to max out your IRA contributions, making a contribution now for 2022 gives you options if your situation changes. Perhaps you will get a bonus, pick up a lucrative side hustle or receive a windfall. It's better to be prepared for a lucky situation than to have a lucky situation and not be prepared for it.
Roth or Traditional
You have a choice of whether to contribute to a Roth or a traditional IRA. There are pros and cons to both options. A Roth IRA is funded with post-tax money, meaning you don't get any tax break for the tax year for which it is contributed. It won't change your 2022 tax bill at all. However, money within a Roth account grows tax-free and is distributed tax-free. On the other hand, you can deduct contributions to a traditional IRA from your income. This will reduce your tax bill for the year you contributed. Money in a traditional IRA is taxed as regular income when it is withdrawn, including the contributions and the growth that happened within the account. There are many factors to consider when deciding whether to contribute to a Roth or a traditional account. The default "right" choice for most people is Roth, unless lowering their taxable income will allow them to get tax credits such as the Saver's Credit or educational credits. But there are numerous variables.
Get Your Year Right
If you open an IRA and make contributions for last year, be sure to indicate that they are for the prior year. Most companies that have IRAs have an easy way to indicate this within their online account access. If it isn't clear, call.
The Saver's Credit
If you're in a lower income bracket, you can even get a tax credit for up to 50% of your retirement savings contributions. Because this credit is based on adjusted gross income, even higher-income families may be eligible in years when the service member is deployed to a tax-free combat zone. If you're unsure how much you can afford to contribute to an IRA, this credit could help.
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