You can open an individual retirement account at any time. However, you must meet the IRA open deadline of Tax Day – April 15 – if you want to make a prior-year IRA contribution.
It’s important to be mindful of the various IRA-related deadlines. If you make a mistake, you might find yourself with a larger tax bill than you anticipated.
Contribution Deadlines for IRA
If you own a traditional IRA, you deduct your contributions for a designated tax year. Unless you specify otherwise, the designated year is the year in which the IRA sponsor receives the contribution. However, you have until the tax filing deadline (normally April 15) to contribute money to an IRA for the previous year.
If you contribute between January 1 and April 15, be sure to indicate on the check and payment stub the tax year to which the payment will apply. If your contribution mistakenly goes to the later year, you’ll lose the earlier year’s deduction. It’s a good idea to scan or photocopy the check before sending it in to ensure you have proof of your intent should problems arise.
Reporting Your Contribution
Deduct your annual contribution to a traditional IRA on some version of Internal Revenue Service Form 1040. You can file your tax return before contributing to your IRA for the previous year, as long as you meet the contribution deadline.
Contributions must be in cash – a check or money order is fine – and you can’t contribute more than your taxable income. As of 2021, you can contribute up to $6,000 (or $7,000 if you’re 50 or older) of your received compensation for the year.
Even if you didn’t work during the year, you can still contribute to an IRA if you received taxable alimony, military differential pay, nontaxable combat pay or file a joint return with a spouse who has compensation.
Deadline for Excess Contributions
If you contributed too much money to your IRA, you have until the due date of your tax return (with extensions) to withdraw the excess amount. Otherwise, the IRS will charge you a 6 percent tax each year on excess contributions remaining in your account.
Deadline for Required Minimum Distributions (RMDs)
The regulations governing traditional IRAs require you to start taking annual minimum distributions when you reach a specified age. The RMD amount depends on your age, IRA balance and expected lifetime, and the IRS provides worksheets to calculate your updated RMD each year. You must include RMDs in your taxable income for the year.
Roth IRAs do not have RMDs.
Congress changed the rules for RMDs in 2020, moving the starting age from 70 ½ to 72. Specifically, if you reach age 72 during the year, you have until April 1 of the following year to take your first RMD, and your second RMD by December 31. Afterward, you have until December 31 to take your annual RMD.
You should be careful not to miss the RMD deadlines, because you’ll be levied a 50 percent excise tax on any amounts you fail to take on time.
IRA Rollover Deadlines
You can transfer money from one IRA to another, or from a qualified retirement plan (i.e., a 401(k), 403(b) or 457 plan) to an IRA through a tax-free rollover completed within 60 days of the withdrawal of money from the source account. If you miss the deadline, the IRS will count the withdrawal as a taxable distribution that may also be subject to a 10 percent penalty unless certain exceptions apply.
Read More: When You Cash Out a 401k How Many Taxes Are Due?
You can avoid the deadline pressure by initiating a trustee-to-trustee rollover of the money from the old IRA to the new one. Similarly, if the source is a qualified retirement plan, you can request a direct transfer to the IRA to avoid the 60-day deadline and the mandatory 20 percent withholding.
Eric Bank is a senior business, finance and real estate writer, freelancing since 2002. He has written thousands of articles about business, finance, insurance, real estate, investing, annuities, taxes, credit repair, accounting and student loans. Eric writes articles, blogs and SEO-friendly website content for dozens of clients worldwide, including get.com, badcredit.org and valuepenguin.com. Eric holds two Master's Degrees -- in Business Administration and in Finance. His website is ericbank.com.