Very Basic Question About maximum amount
Please pardon my ignorance and my very basic question. I am about to start an IRA (before April 15th) and plan to contribute the maximum amount for 2020. In addition, I plan to contribute 1/12 of that amount for the months of January-April of 2021. Moving forward, I will continue to contribute 1/12 of the maximum amount every month.
Am I doing something wrong? How does it get determined that I am not going over the maximum amount? What I am really doing is putting all of 2020 at one time. Then putting the first four months of this year in, and finally contributing monthly after that. And I plan to continue contributing monthly. Is it okay that everything is in one account? How do I differentiate the years of contribution so that I don’t go over the maximum.
Thanks in advance!
Permalink Submitted by Alan - IRA critic on Thu, 2021-04-08 21:25
Contributions you make in the contribution overlap period (usually 1/1 to 4/15, but this year to 5/17) must be specifically flagged for which year the contributions are to be recored. Therefore, your contribution for 2020 must be carefully labeled as a 2020 contribution. Then immediately check your IRA statement to make sure it was recorded for 2020 rather than 2021. Other contributions you make through 5/17 can be labeled for 2021. Perhaps you should reduce the number of contributions to reduce the chance for error. You already have 4 months of 2021 contributions to make up, although you will have until 4/15/2022 to make your 2021 contributions. It will also make things simpler if you are able to avoid prior year contributions going forward so that all contributions apply to the year in which they are made.
If you have the money, you can make your contributions before you have the earned income, as long as you will have the required earned income by year end.
Contributions for a given year are reported to both you and the IRS on Form 5498 for each IRA account you contribute to. But there is no need to open more accounts for different contribution years.
Since the 5498 is not issued until the following May for the prior year, you should check your IRA account statements to be sure your contributions are allocated to the year you intended when you made the contributions. Do NOT send in a single check with contributions for more than one year.
This overlap period ends on 4/15 (5/17 this year). After that date until year end contributions made can only be for the current year. Therefore, you may want to hold off until after 5/17 to make 2021 contributions, then make them all by year end. After that, you may be able to avoid making any prior year contributions in the overlap period.
Permalink Submitted by Todd Tipton on Thu, 2021-04-08 22:33
Thanks for, not only an amazing answer, but also answering what I didn’t think to ask. Awesome!