Early Year IRA Contribution Question-and-Answer

By Jeffery Levine, IRA Technical Expert  

Follow Me on Twitter: @IRAGuru4EdSlott

Last week I posted a video discussing the importance of contributing to your retirement account early in the year. Without putting any more money into your account over the long run, by simply making your IRA contribution early in the year, as opposed to year-end (or even by April 15 of the following year), you can easily wind up with tens of thousands more in your retirement account to spend during your golden years. In response to the video, as well as the time of year in general, we’ve received a number of questions. Here are some of the most common ones, along with their answers.

Q: I haven’t yet earned $5,500 in 2014, can I still make a full IRA contribution now?

A: Yes. As long as you have enough “compensation” – usually earned income – by the end of a year to support a contribution, you can make that contribution at any time during the year, even if you haven’t yet received any (or enough) compensation. For instance, on January 1, 2014 you made a full $5,500 ($6,500 if 50 or older by the end of the year) IRA contribution even though you had no compensation for the year yet. As long as you have $5,500 ($6,500) of compensation by December 31, 2014, you’re fine.

Q: I haven’t made my IRA contribution for 2013 yet, but I understand how important it is to contribute to my IRA early in the year. If I only have enough money to make a contribution for one year right now, should I make it for 2013 or 2014?

A: Although it is important to make your IRA contributions early in the year, if you can only afford to make a contribution for one year right now, you should make it for 2013. You can only contribute to your IRA for 2013 until April 15, 2014. In contrast, you have all the way until April 15, 2015 to make your 2014 contribution. You can make your 2013 contribution now and then, hopefully, before too long, you can follow it up with one for 2014.

Q: If I make an IRA contribution now and have not yet made a contribution for 2013, will my custodian treat it as a 2013 IRA contribution?

A: Probably not. In absence of some indication from you regarding the fact that you intend your contribution to be a 2013 contribution, your IRA custodian will almost certainly treat any contribution made in 2014 as a 2014 contribution. If you plan to make a 2013 IRA contribution before the April 15, 2014 due date, contact your custodian or financial advisor to find out what procedures you need to follow to make sure your IRA contribution year is coded correctly. Remember, IRS gets notified of your IRA contributions each year via IRS Form 5498.

Q: What if I contribute to my Roth IRA now, early in the year, but realize later that I am prohibited from making a Roth IRA contribution because I am over the applicable income threshold?

A: You have two choices. One option would be to withdraw the contribution and its earnings as a distribution of excess contributions. The other option would be to recharacterize the contribution from a Roth IRA to a traditional IRA. You’re probably better off doing the recharacterization. This way, although the money is not growing tax-free, it’s still set aside for your retirement and growing tax-deferred.