You have until April 18, 2017, to make a 2016 Roth IRA deposit.  This is especially important if your 2016 earnings will be lower than what you will earn in 2017.  Perhaps you’re a college student or recent graduate.  Maybe you were unemployed during 2016.  Creating a retirement account may seem like a low priority.  Recall The Money Skinny™ mission is to save you time and money.  Let’s take a look at traditional versus Roth IRAs and how to maximize your money with an Individual Retirement Account.

Why an IRA

An Individual Retirement Account is a tax advantaged way to save for retirement.  It’s especially important to begin savings when you’re young.  To let the money grow.  Think of it as an investment in your future self.  Here is a list of IRA Frequently Asked Questions from the IRS website.

Traditional vs Roth IRA

A traditional IRA deposit is tax-free.  Income taxes are due on withdrawal.  Roth IRA deposits are after-tax.  No income taxes are due on withdrawal.  Both types of IRAs do not owe income taxes while accumulating.  The 2016 contribution limit is $5500.  Here are details on IRS Contribution Limits from the IRS website.

For Example

Suppose you make the $5500 max deposit into an IRA by April 18, 2017, that grows into $200,000 in 30 years.

• With a traditional IRA, that deposit is tax-free.  Deduct $5500 from earnings on your 2016 income tax return.  When you start withdrawing the $200,000, the gain is taxable.  Tax-free deposit/gain taxed.
• With a Roth IRA, that deposit is after-tax money.  The Roth deposit does not impact your 2016 income tax return.  When you start withdrawing the $200,000, the gain is not taxable.  Taxed deposit/gain tax-free.

Special Situation

It is especially important for people that earned less money in 2016 than they will in 2017 to make a Roth IRA deposit.  Why?  Because the 2016 tax bracket will be lower.  Perhaps you graduated from college last spring.  Maybe you were unemployed for part of 2016.  You will be in a lower tax bracket in 2016.  That is a prime opportunity to make a Roth IRA deposit.

Hurry

The deadline for making a current year IRA deposit is April 15th of the following year.  Graduating from college this spring?  Make creating a Roth IRA account a priority.  IRA deposits can be made until the income tax filing deadline of the prior year.  Perhaps you read The Money Skinny™ post Filing Your Income Taxes Late and requested a filing extension.  There is no extension available for an IRA deposit.

Deposit Limits

Think you’re going to do a wealth transfer by packing Junior’s IRA every year starting as a bambino?  Not so fast, Buster.  Roth IRA deposits are limited to W2 income.  No job?  No deposit.  Waiting tables at a campus restaurant?  Sock some of those earnings away in a Roth IRA.  Your future self will thank you.