The IRS Time Machine to Fix Your Empty IRA Problem

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Everybody assumes you can only fix your retirement account problems around the end of December. However, that couldn’t be more wrong. In fact, the IRS generously gives a gift that keeps on giving. You have until Tax Day of the following year to make any IRA contributions that can count for the year prior. You can fix your empty IRA problem by looking out for these special cases and seeing if any apply to you.

Case 1: You Made Money at a Random Job 2015 and Have Cash To Burn

Maybe you had a summer internship in 2015 or a part time job where you got some side money while you were in grad school. For every dollar of earnings you have up to $5,500, you can contribute to a Roth IRA or Traditional IRA. That contribution can still be counted towards the year 2015 until Monday April 18.

Here’s a common example. Dan is a civil engineering student at a large public state university. He worked from May to August at a local firm in his hometown and made about $7,000 for the summer. Since he lived with his parents, he kept virtually all of that. His parents already contribute to his college education and give him free rent and money for food. Therefore, this $7,000 is just sitting in the bank doing nothing. When Dan files his taxes, he can actually take $5,500 of this money and open up a Roth IRA with a company like Vanguard or Schwab and invest in index funds. He is a student so is in a really low tax bracket. Furthermore, if he needs this money for education, health care expenses or buying a home in the near future, he can withdraw the principal (original contribution) and the earnings penalty free in most cases.

Case 2: You Want to Get Extra Money Back in Your Refund Check

Did you know that you could put a lump sum into your Traditional IRA when you do your taxes and get a reward of $1,000 or more for doing it? If you have money in the bank, you’ve probably already paid taxes on it from your work place tax deduction. When you take $5,500 and deposit it into a Traditional IRA and claim it for 2015, you get to immediately deduct that on your taxes if you made below a certain dollar amount ($61,000 if single). This approach works really well for folks who barely fall in the 25% tax bracket as a single person (between $45,000 and $61,000 in income to get the full deduction).

Here’s an example. Sue worked at an accounting firm while still pursuing her educational credentials. She made $55,000 total last year. She has about $6,000 in the bank from savings. She knows that is on the high side but does not want to completely reduce her account to $0 because she’s heard an emergency fund is important to have. She could contribute $5,500 and deduce that fully at the 25% tax bracket. She would therefore save at least $1,375 and could replenish her bank account with that immediately upon filing her taxes. She saved $5,500 and got to keep $1,875 in her bank account. She started with $6,000 and after taxes she is now left with $7,375 in total wealth! People would choose this option if they value having a monetary reward upfront for saving.

Case 3: You Want to Leave Yourself Open To Contributing for 2016

When you contribute to your IRA before April 18 of this year, your financial institution will ask you if your contribution is for 2015 or 2016. Make sure you elect the 2015 option because you will be able to contribute again for 2016 if you also have earned income in this year. If you know you will be making enough earned income in 2016, and you know you will not exceed income limits for IRAs, then you could contribute twice even.

If you need to fix your empty IRA problem, you could contribute now, then set yourself up for automatic deductions. You could put the lump sum of $5,500 for 2015 to get yourself started, then get set up for $100 to $458 a month regular deductions. That would allow you to dollar cost average into your stock and bond positions. You can also prevent yourself from spending the money before you pay yourself first and protect your own retirement.

Tax Time is a Great Excuse to Fix Your Empty IRA Problem

The government set up this loophole intentionally. They know that folks do not think about contributing to retirement at the same time they are breaking out champagne and fireworks to bring in the new year. Americans are forced to think about their finances each April, and that is why the government allows you to catch up. If you have money in the bank, because it has most likely been taxed already why not contribute to a Roth IRA where it is tax protected?

If you are short on money and want a bigger refund check, why not contribute to a Traditional IRA and get money back that you can spend in good conscience? It is a great thing that you get until April to fix the mistakes of last year. Anyone not contributing to IRAs during their working years is asking for trouble. Social Security is clearly not that secure, otherwise politicians would not be fighting over it tooth and nail. Medicare and Medicaid project to bankrupt the entire country within a few decades. I would not want to enter old age in a time like the one we will be retiring into without financial security. The best way to give that to yourself is by setting up an IRA. It is the best vehicle for making money for the average working man or woman that the government ever allowed. Do not be sad if you have an empty IRA problem. Fix it before April 18 of this year.

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