Can't max out your IRA by the end of 2022?  Here's why you don't have to worry

Can’t max out your IRA by the end of 2022? Here’s why you don’t have to worry

(Maurie Backman)

When it comes to retirement savings, IRAs are a mixed bag. On the plus side, they usually come with more investment options than you’ll find in a 401(k) plan. For example, with IRAs, you can invest in individual stocks, whereas 401(k) plans generally don’t let you do that. But picking stocks by hand could mean building an investment portfolio that better matches your goals and risk tolerance, which is an important thing.

Another difference between IRAs and 401(k)s is that they come with lower annual contribution limits. So even if you’re struggling to max out a 401(k), you might have a much easier time hitting that annual limit on your IRA.

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Of course, it can also be argued that lower contribution limits are a bad thing. The more money you are able to save tax-efficiently, the more tax you can save, and the more nest egg you can accumulate. But alas, IRA limits lag far behind 401(k) limits, so if you want to see this in a positive light, you can focus on the fact that the maximum may be much more achievable.

What if it’s not feasible this year? You may have had to put your IRA contributions on hold to deal with inflation. Or maybe you had a personal financial problem that required you to divert money elsewhere.

Either way, if you haven’t yet maxed out your 2022 IRA and you’re not sitting on a pile of cash, you might not be able to hit that max by then. end December. But that doesn’t mean that maxing out this account isn’t possible.

You get more time

If you’re saving for retirement in a 401(k), you only have until the end of a given calendar year to put money into that account. So if your goal is to maximize your 401(k) for 2022, your final contribution must arrive in your account by December 31.

But IRAs give you until the next year’s tax filing deadline to make contributions. So technically you have until mid-April 2023 to finish funding your 2022 IRA. That gives you a lot more time to reach your savings goal.

And it’s not just IRAs that have this rule. If you spend money for medical expenses in a Health Savings Account (HSA), you also have until the 2023 tax filing deadline to finish funding your account for 2022 purposes.

In fact, it might make more sense to prioritize your HSA over your IRA if funds are limited and you’re forced to choose between the two. The reason? HSAs offer more tax advantages than any other tax-advantaged account.

With an IRA, your contributions are tax-free if you save in a traditional plan, but investment gains are eventually taxed and withdrawals are taxed in retirement. Now, if you have a Roth IRA, you won’t get tax-free contributions, but investment gains and retirement withdrawals will be tax-free.

HSAs give you all three tax breaks. Contributions are tax-free, investment gains are tax-free, and withdrawals are tax-free when used for medical expenses. And since you can pretty much rely on healthcare expenses to meet your entire life, it really pays to max out an HSA if you can.

Know the rules

When it comes to retirement savings, each plan has its own rules regarding investments, contribution limits and when you can contribute. Knowing how your plan works could help you reach your savings goals.

But for now, you can rest assured that if you don’t think you’ll succeed in maximizing your IRA (or HSA) this month, you’re not out of options. You can take steps to free up money in early 2023 and finish funding your savings then.

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