How to make a last-minute IRA contribution

There's still time to meet the IRA contribution deadline for 2022.

  • By Emily Brandon,
  • U.S. News & World Report
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It's not too late to reduce your 2022 tax bill, if you are willing to set some cash aside for retirement. The deadline to make an individual retirement account contribution that will decrease your 2022 tax bill or even boost your refund is the due date of your tax return, which for most people is April 18, 2023.

Here's how and why you should make a last-minute IRA contribution:

  • Reduce your 2022 tax bill.
  • Watch for IRA income limits.
  • Defer income tax on future investment gains.
  • Create tax-free retirement income with a Roth IRA.
  • Use your tax refund to fund an IRA.
  • Make sure your IRA contribution applies to the correct year.
  • Avoid spending temptations.
  • Qualify for the saver's credit.

Reduce your 2022 tax bill

As you prepare your tax return, you can plug in an IRA contribution and see exactly how much your tax bill will decline. For example, a worker in the 24% tax bracket who contributes $6,000 to an IRA will pay $1,440 less in federal income tax. Taxes won't be due on that money until it is withdrawn from the account.

The last day to contribute to an IRA for 2022 is the tax filing deadline in April 2023. "Making an IRA contribution before the filing deadline is a good idea if you haven't made a contribution yet or haven't maxed out your contribution and have the available funds," says Arielle Minicozzi, a certified financial planner for Modern Money Education in Orlando and Phoenix.

You can defer paying income tax on up to $6,000 that you contribute to an IRA, or $7,000 if you are age 50 or older in 2022. Married couples can open an account in each of their names for double the tax break.

Watch out for IRA income limits

If you have access to a 401(k) plan at work, the IRA tax deduction is phased out for those with a modified adjusted gross income between $68,000 and $78,000 as an individual and $109,000 to $129,000 for married couples in tax year 2022. If only one member of the married couple has a 401(k) account, the IRA income limits climb to $204,000 to $214,000 for 2022.

"Be careful that you don't accidentally over-contribute based on your income level and whether you've previously made a contribution for 2022," Minicozzi says.

Defer income tax on investment gains

You don't have to pay income tax on the investment growth in your traditional IRA each year. Taxes won't be due on the retirement savings in an IRA until you withdraw the money from the account. If you drop into a lower tax bracket in retirement, you will pay less tax on your retirement savings and reduce your lifetime tax bill by saving in an IRA.

For example, a worker in the 24% tax bracket would pay $1,200 for income tax on $5,000 worth of income. However, if he saves that $5,000 in an IRA and then withdraws it in retirement, after he has dropped into the 12% tax bracket, he will pay only $600 for income tax on the IRA distribution.

Create tax-free retirement income with a Roth IRA

An after-tax Roth IRA allows you to pay your current tax rate on your Roth IRA contributions, and then withdrawals in retirement, including the investment earnings, are typically tax-free.

"If you find yourself in a very low tax bracket in the 2022 tax year, then it is a great opportunity to make a Roth IRA contribution. The money you add to a Roth IRA will be after-tax, but all future growth in the account will be tax-free when used in retirement," says Eric Simonson, a certified financial planner for Abundo Wealth in Minneapolis.

Those who earn less than $144,000 as an individual or $214,000 as a married couple are eligible to make a Roth IRA contribution for 2022. The ability to make a Roth IRA deposit is partially phased out for individuals who earn more than $129,000 and couples with a modified adjusted gross income over $204,000.

Use your tax refund to fund an IRA

IRS form 8888 allows you to directly deposit part or all of your tax refund in an IRA. You can file a tax return claiming a tax deduction for an IRA deposit before the money is in the account as long as you make the contribution by your tax filing deadline.

Make sure your IRA contribution is applied to the correct tax year

Take care to specify that you want the contribution to be applied to your 2022 tax return, because IRA providers are allowed to automatically count the deposit toward the calendar year in which it is received unless you indicate otherwise.

"If you try to make a 2022 contribution today, make sure that the contribution is coded as a 2022 and not a 2023 contribution," says Mike Hennessy, founder and CEO of Harbor Crest Wealth Advisors in Fort Lauderdale, Florida. "Make sure your custodian can, knows how to and will confirm your contribution is indeed a 2022 contribution."

Avoid spending temptations

An IRA makes it a little more difficult to spend your nest egg before retirement. If you take a withdrawal before age 59 1/2, there's typically a 10% early withdrawal penalty, and you will have to pay income tax on the distribution. A $1,000 early withdrawal could result in $340 in taxes and penalties for someone in the 24% tax bracket.

However, there are a variety of exceptions to the early withdrawal penalty that include many serious needs for the money such as large medical bills, health insurance after a layoff, college costs, the birth of a child and a first home purchase.

Qualify for the saver's credit

If you save in an IRA and you have a 2022 adjusted gross income of less than $34,000 as an individual, $51,000 as a head of household or $68,000 as part of a married couple, you might be eligible for the saver's credit. The saver's credit is worth between 10% and 50% of your IRA contribution of up to $2,000 for an individual and $4,000 for a couple, with bigger credits going to savers with lower incomes. The saver's credit can be claimed in addition to the tax deduction for contributing to a retirement account.

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