If you’re like most of us, you watched your New Year’s resolutions wither away last year. All the grand plans you had for 2016—saving for retirement, bolstering a college tuition fund, have been dead for months now.
The year is gone. You didn’t contribute like you should have, and you’ve even lost out on some tax breaks. Or have you?
Good news! You’ve still got time to make some last-minute financial tax moves in 2017 to save money and lessen your overall income tax liability towards 2016. Contributions made to certain investment accounts can be retroactively counted for the outgoing year until April.
How is that possible? Even though we’re well into 2017, 2016 isn’t truly over and done -- at least not as far as your taxes are concerned.
It may sound like some kind of strange financial time warp, but it’s not. The new tax year technically doesn’t begin until after this month’s final filing date, so some money moves you make right up until your tax return is due -- let’s call them New Year’s tax resolutions -- are still allowed for 2016 by the IRS.
Consider contributions to these accounts and list them on your tax return to complete last year’s financial resolutions:
Traditional or Roth, you can max out your contributions to whichever Individual Retirement Account you choose today and file for a 2016 tax deduction. For both IRAs, you’re allowed a maximum annual contribution of $5,500 or, if you’re age 50 or older, $6,500.
The good thing about IRAs is that they’re one of the few tax-deferred vehicles that don’t have a deposit cutoff of December 31, so if you had been wanting to contribute more and assumed that you were done for 2016, you still have the first quarter of 2017 to add to your account.
Now, if you’re looking for a quick tax break, put money into a regular IRA; contributions are tax deductible, withdrawals are taxed. Roth IRAs are the other way around: contributions aren’t tax deductible, withdrawals are, but it can still make sense to bolster your retirement savings with a late-game contribution no matter which account you hold.
Keep in mind that there are some contribution limitations on Roth IRAs depending on your filing status and modified adjusted gross income, or MAGI. For instance, if you’re a single head of household and earned $132,000 last year or more, you can’t make Roth IRA contributions. Married and filing jointly? A MAGI of $194,000 or more excludes you from Roth deposits.
If there’s room in your budget, try to make an IRA contribution push when the tax deadline approaches, and give the maximum amount, if possible. Not only will it advance your retirement savings, but it gives the added incentive of a tax break.
Health savings accounts (HSAs) are another tax advantaged way to set aside money for out-of-pocket medical expenses through a high-deductible health insurance plan.
Just like an IRA or other retirement account, HSAs are funded with pre-tax, gross income dollars, so adding to your account in the 11th hour of tax filing season can significantly lower the amount you owe in taxes: one, through the deduction you make on your tax return, and two, on the qualified expenses the funds will pay for, like office visit fees, prescription medication or equipment. Check out a more comprehensive list here.
HSA contribution limits are due to rise this year, but remember, you’re still making contributions for 2016 tax purposes, so you’re allowed to deposit up to $3,350 if you’re a single filer, $6,750 for families.
If you have an HSA and a flexible spending account (FSA), make sure not to confuse the two in this case. While you can add to your HSA right up until the tax filing deadline, the FSA contribution cutoff is at the end of the regular calendar year, December 31.
Education and college savings plans
There are a couple of ways to save for a college education—Coverdell ESAs and 529 savings plans. Both are tax advantaged, and both also have contribution deadlines of April 18.
Both accounts are custodial trust funds allowing you to name a beneficiary, like a child or grandchild, to save for future college fund (or in the case of the ESA, some elementary and secondary school costs), where contributions and withdrawals are tax free.
If you have both accounts actively in place, and you’re looking to contribute by the income tax filing deadline, which one do you choose? It all depends on how much money you’re looking to contribute, what your limits are -- and more important, for 529 plans, where you live.
One limitation to Coverdell ESAs is their seemingly low annual contribution cap: $2,000 per year. But you have until April 18 to meet this limit, even if it’s a full deposit for a tax break.
For 529 plans, normally you’d have had until December 31 to make contributions, which technically have no limit. You can contribute $1 million a year for your beneficiary’s future college fund if you like, but we wouldn’t recommend surpassing $14,000, since anything under that amount is considered a tax-free gift under IRS rules.
Further contributions up to April 18 can be made if you live in one of 30 different states with the deadline extension -- and for states like Iowa, you have until April 30. However, check the individual tax rules in your state if you’re making a late-year contribution, since yours may only offer partial tax deductibility.
Which account should you choose if you have both? Consider how much you have saved in each one and decide which fund you’d like to see funded more. The tax benefits are basically the same at deposit and withdrawal, but make sure to use your savings for educational purposes, or you could get penalized by Uncle Sam.
Which retroactive contributions are excluded?
Some tax-deferred investment accounts have strict end-of-year cutoff dates with no extensions, so if you have a 401(k), or you like to donate to charitable organizations, your current contributions will have to count towards the 2017 tax year.
If you want to make one of these retroactive deposits into a retirement, health or education savings account, don’t overextend your budget and go into debt just for the tax break. As you prepare your tax return, calculate if you’ll owe money, or if you’ll be getting a tax return, and use discretion, since the money you contribute may offset one or both.
And when you fill out your tax return, make sure you clearly list that the retroactive contributions you’ve made are for 2016. If no year is listed, the IRS won’t count it. (You could still count it on your 2018 tax return, but that means waiting another year for the tax benefit.)
Do all this by mid April, and it gives you a perfect opportunity to move ahead and know which investment contributions are due by the end of December, and which ones give you until the end of tax season.
Set annual contribution goals, and know what your deadlines are, and you’re not making retroactive contributions anymore; now, you’re looking into your financial future.