The individual retirement account structure – and self-directed IRAs in particular – can be a solid foundation for a successful retirement plan. But in order to build the largest possible retirement nest egg, it’s important to make regular contributions to your account. The rules on IRAs specify limits for how much you can contribute each year, so it’s important to make sure your savings plan and budget are synchronized with the annual limits.
The Annual Contribution Period can be up to 15 Months. The period in which you can make a contribution to your self directed IRA for a given tax year is from January 1 of that year until you file your tax return. But in no case can such contribution be made after your filing deadline (i.e., April 15 of the following year).
You May Need to Specify. Even if you only have a single IRA, it’s important to pay attention to how you designate each contribution. Recognize that if you are making a contribution early in a calendar year, before you file your tax return for the prior year, you need to specify the tax year for which your contribution applies.
For example, if you send a contribution to your IRA custodian on January 10, it won’t be clear whether you intend for those funds to apply to the tax year that’s just ended, or to the tax year that’s just beginning. You can clear up any potential confusion by making the appropriate designation in the “memo” line of the check you sent. Or if you make the deposit or transfer of electronically, indicate the applicable tax year in any “note” or “other instructions” field of the submission form. (For electronic transfers, your custodian may even ask you to specify the applicable tax year).
Easing Your Administrative Burden. But note that this contribution calendar overlap also provides you the opportunity to address two years’ worth of IRA contributions in a single sitting. Simply write two checks to your IRA custodian, specifying which check applies to which tax year. Of course, if those two contributions do not meet the contribution limits for either or both years, you can make additional contributions later, provided you are still within the applicable time period.
Use it or Lose it. With a generous contribution period that extends beyond December 31 of each tax year, it’s easy for some individuals to take the contribution opportunity lightly. But because IRA contributions are a “use it or lose it” proposition (meaning that if you don’t make a contribution in a given year – or don’t make the maximum contribution – you can’t make up for it later), it’s important to put yourself in a position to be able to make that maximum contribution year in and year out.
Consider a $5,500 contribution made by a 30-year-old to their self-directed IRA. Assuming an 8% return, that single contribution will be worth well over $80,000 by the time that person reaches age 65. Don’t miss out on this opportunity, and make sure you meet the annual contribution deadlines to the greatest extent possible.