Home Retirement Want to Max Out Your Retirement Accounts for 2023? Mark This 2024 Date on Your Calendar

Want to Max Out Your Retirement Accounts for 2023? Mark This 2024 Date on Your Calendar

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The beginning of the year is a popular time for people to set new resolutions and goals. There’s something about a fresh start that adds a bit of inspiration that many people find themselves needing.

One aspect of people’s lives that often gets put under a microscope during this time is finances. Not only can it be a good time to review your budget or investment strategy, but it can also be a good time to revisit your retirement plan and goals, and to see if you’re still on track.

One thing I always encourage people to consider during this time is maximizing contributions to an IRA if possible. If you weren’t able to do so last year, don’t fret — there’s still time to max out your 2023 contributions in 2024.

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The importance of Tax Day to IRAs

Tax Day is the deadline for filing federal income tax returns, so it’s not a day you want to glance over and ignore. In most years, it occurs on April 15 unless that day falls on a weekend, in which case it’s moved to the next business day.

Taxes aside, Tax Day is important because it’s the last day you have to make contributions to your IRA for the previous tax year. For example, you have until April 15, 2024 to max out your IRA contributions for tax year 2023. In 2025, you’ll have until April 15 to make IRA contributions for tax year 2024.

Having an extra three and a half months to make contributions for a given year can be helpful for people who need a little bit more time to earn the funds or want to strategically plan their contribution timeline to match their personal financial situation.

It’s worth noting that you can contribute to an IRA for a given year starting on Jan. 1 of that year; you don’t have to wait until Tax Day. In other words, from Jan. 1, 2024 to April 15, 2024, you can contribute toward both your 2023 and 2024 IRA thresholds.

A single investment can go a long way with time on its side

For tax year 2023, the maximum amount you can contribute to an IRA is $6,500 ($7,500 if you’re 50 or older). Although those amounts are relatively small in the grand scheme of retirement, they can add up over time thanks to compounding earnings.

Here’s how much a single $6,500 or $7,500 investment would grow if it averaged 10% annual returns over different time spans:

Years Invested Initial $6,500 Investment Initial $7,500 Investment
10 $16,800 $19,400
15 $27,100 $31,300
20 $43,700 $50,400
25 $70,400 $81,200
30 $113,400 $130,800

Calculations by author. Values rounded down to the nearest hundred.

A dollar today can be worth several dollars down the road. According to the Rule of 72, an investment could double in 10 years if it averaged 7.2% annual returns. Don’t underestimate just how powerful a force time can be.

Choosing between a Roth and traditional IRA

Roth and traditional are the two main types of IRAs with the key difference related to their tax advantages. Roth IRAs allow you to contribute after-tax money and take tax-free withdrawals in retirement. Traditional IRAs allow you to contribute pre-tax money with the potential to deduct your contributions from your taxable income. It’s only when you take withdrawals in retirement that your tax bill comes due. Keep in mind the benefits of these accounts will change depending on your income, filing status, and if you’re covered by a retirement plan at work.

Choosing between a Roth and traditional IRA generally depends on when you want to pay taxes.

If you’re fairly early in your career and your earnings are likely to increase in the coming years, you should consider taking advantage of a Roth IRA because you can pay taxes now and then get tax-free withdrawals when your tax bracket will likely be higher.

On the other hand, if you’re in your peak earning years, a traditional IRA might be more beneficial because you can potentially enjoy the tax break upfront and then pay taxes when you’re in a lower tax bracket in retirement.

Regardless of which account you choose, making contributions before Tax Day could significantly benefit you in the future. You’ll thank yourself later.

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