As the days tick down toward the holiday season, kids are eagerly anticipating what Santa will leave them in their stockings.
Well, Uncle Sam wants to give YOU a gift as well – that’s right, the government wants to hand you some money.
Although most people would love to get free money handed to them from the government, very few people actually take it when it’s offered to them each and every year.
Let me explain…
Each year, the IRS allows a certain amount of contributions to your IRA. To summarize for 2015, the IRS allows contributions of $5,500 per person until the age of 50, and $6,500 per person between the ages of 50 and 70½ (with some exceptions – see the IRS website for all the details).
Here’s how the free money factors in:
- If you contribute to your 401(k) with before-tax dollars, you can reduce your taxable income by the amount of that contribution. Any money you make in your 401(k) can be invested to grow.
- If you contribute to your Roth IRA with after-tax dollars, any money you make can be pulled out tax-free.
Regardless of the kind of account you use, you’re getting an advantage – reduced tax liability up-front or on the back-end. Either way, that’s like the government handing you money!
And the best part is, because your IRA is an investment account, you can investment that money to grow it. So, by the time you’re ready to retire, you’ve built up a nest-egg that is partially built on free (tax advantaged) money.
For that reason, it’s essential that you contribute up to your full amount every year. That’s because these limits are set each year and, once the year is over, you don’t get to accumulate unused amounts in the future. The rule “use it or lose it” applies: Use your contribution space or lose it for ever. (Note: Some exceptions apply, such as in the case of an excess contribution one year followed by an under-contribution the next year, but “use it or lose it” is the general rule).
And, by contributing by the end of the year, you make it easy on yourself to apply that contribution to your 2015 contribution limit. (You can contribute to your 2015 limit right up until April 18, 2016, but if you contribute in the new year, you have to make a call to the bank to let them know that you want to apply it to 2015 – so that’s extra work for you, and totally unnecessary if you contribute on or before December 31.
Here’s What To Do Now
Determine how much contribution limit you still have available this year and contribute up to that limit. (If you’re not sure how much your limit is, or how much you’ve contributed so far, contact your IRA custodian).
… And make sure you contribute in full before December 31 to take full advantage of the government’s “free money” program!
So, while the children in your family are eagerly counting down until December 25, you should be eagerly counting down to December 31. That’s the end of the year and it should signal a personal deadline for your Individual Retirement Account (IRA) contribution.
About the Author
Edwin Kelly is an author, speaker, investor and CEO of Specialized Trust Company. He is considered America’s leading expert on Self-Directed IRA’s. To learn more about getting started please call 800-529-3951 or click here.