Wait, what?  Did you say I can still save for retirement last year?

Maybe you arrived in January 2023 feeling like you didn’t make good on your 2022 retirement savings goal.  It was a rough year and keeping cash in the bank probably made a lot of sense while the economy did what it did in 2022.  Maybe you always had the cash, but you just didn’t have the discipline.  Or maybe you only just now have the cash and wish you could go back in time to contribute.  I have some good news for you:  you can still make annual retirement contributions to the 2022 bucket, in some cases even tax-deductible ones.

Am I too late to make a retirement contribution for 2022?

The good news:  you are not too late to contribute to your IRA for the 2022 tax year.  You may continue to contribute up to the annual maximum of $6,000 per year ($7,000 if over age 50) until the tax filing deadline [Monday, April 18, 2023].  This limit applies regardless of how much you have contributed to your employer-sponsored plan such as TSP, 401(k), 403(b), SIMPLE, and SEP-IRA.

The bad news:  Your employer-sponsored plan contributions for the 2022 tax year are over.  The deadline for annual contributions to your employer-sponsored retirement savings plan is always December 31 of the year.  Your employee contribution to these types of plans must come directly from your paycheck each month.  You cannot write a check or initiate a transfer from your bank account to be deposited into an employer-sponsored plan.  This means any deductions from your pay toward those accounts after January 1st of the new year are now counting toward the new year’s limit.  TSP, 401k, and 403b accounts have a new annual limit for 2023: $22,500 per person and an extra $7,500 “catch-up contribution” for those over age 50 ($30,000 total).  For a SIMPLE account, the limits are $15,500 (under 50) and $19,000 (50 & over).

How do I make sure my contribution will count for 2022 if it is already 2023?

Nearly every investment custodian has provisions for designating the tax year for your contribution during this “in-between time” when two years are possible.  When you sign-in to an online account to contribute, you should see both the 2022 and 2023 tax years listed, along with your allowable contribution based on age and the amount you have contributed so far to each of those tax years.

For instance, Captain Sue Savemore is 30-years-old and made an $800 contribution to her Roth IRA in June 2022.  When she logs in to her online account information, it says she can still contribute $5,200 for 2022 ($6,000 – $800) and the full $6,500 for 2023. 

There will be a place to designate which tax year and how much she wants to contribute.   She would enter the amount she wants to contribute in the space for the 2022 tax year, up to the available remaining limit for 2022.  If she wanted to contribute more than $5,200, she would need to enter any further amount as a 2023 contribution.

So, if Captain Sue Savemore has $7,000 sitting in her bank account and wants that full sum to go to IRA contributions, she would put $5,200 in the designated space for the 2022 contribution and $1,800 in the designated space for 2023 contribution.

Why do I want to make a 2022 IRA contribution now?

You may be asking yourself why you would want to make 2022 contributions instead of 2023, especially if you are someone who does not typically “max out” their IRA each year.  Filling up the bucket whose window of opportunity is closing (2022) preserves your full capacity to save in the bucket that has the longer window of opportunity (2023).

Consider these scenarios:  

  1. You or your spouse have a job where you regularly “max out” your employer’s plan (make the maximum allowable contributions as listed above).  You know and appreciate the value of saving early for retirement.  However, you do not have enough cash flow to also max out your IRA each year.  Then you find yourself leaving a job in 2022 and moving to an employer who does not have a retirement savings plan.  By contributing to the 2023 IRA right now and leaving the 2022 bucket unfilled, you have just robbed yourself of some of your capacity to save.
  2. You may find yourself in a situation with an unexpected raise or bonus or other windfall later in 2023 and want to earmark it all for playing catch-up with retirement savings.  Again, if you leave your 2022 bucket less than full and start using up the capacity in your 2023 bucket, you just shorted yourself on that opportunity.

Does it matter if the contribution is Roth or Traditional?

The remaining 2022 contribution amount can be either Roth or Traditional, no matter what you may have already contributed in 2022.  The annual limit applies only to the total IRA contributions, not the tax treatment of the contribution.  Back to our example using Captain Sue Savemore:  if she should decide she wants to make the remaining 2022 contribution of $5,200 to a Traditional IRA, that is perfectly OK.  If she did not already have a Traditional IRA account, she could open one and fund it before the tax deadline and it would still count for the 2022 tax year.  Her combined contribution for 2022 would be $800 Roth + $5,200 Traditional = $6,000 annual limit.

How do I choose between Roth or Traditional contributions?

One of the beauties of making an IRA contribution late in the tax year is that you have a better sense of your tax scenario for that year.  Choosing between Traditional or Roth tax treatment most often depends on your expected marginal tax rate.  [if you need a quick primer on this, see this video from a recent Military Saves campaign, produced by yours truly].  

However, there are two more decision points to consider when making IRA contributions:  

(1) whether or not you are covered by an employer’s plan, and

(2) what you modified adjusted gross income (MAGI) is expected to be.

First, let’s look at the IRS definition of MAGI:

“For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return before subtracting any deduction for student loan interest.”

This means that for most military families, if your income has stayed more or less the same in 2022 as it was in 2021, look back at your 2021 tax return, line 11 and add in any amount found on Schedule 1, line 21 to get a rough guess on your MAGI.  You can take a look at your 2022 W-2(s), add interest, and do a quick calculation of your MAGI using this free 1040 tax calculation tool found on the Office of Financial Readiness website – a great educational resource on a whole host of financial topics.

If you are COVERED by an employer-sponsored plan, your ability to make a tax-deductible Traditional IRA contribution is limited.  Being “covered” is not the same as “participating”.  Every servicemember is covered by an employer plan (TSP), whether they have ever contributed any money or not.  If you are covered, then these covered employee IRS limits will tell you if your contribution is deductible.

Looking back at the example of Captain Sue Savemore:  In 2022, Sue is a “single” tax filing status.  With eight years of service as an O-3, her taxable income for 2022 was $81,684.  This puts her above the limit for single taxpayer ($78,000 MAGI) and unable to make a tax-deductible Traditional IRA contribution, even if she did not contribute a single dollar to TSP.

So now you are thinking, “well, just make a Roth contribution instead, since Roth contributions are not tax deductible anyway.” This would be an equivalent tax situation, and Roth contributions are not limited by coverage under an employer plan.  The only limit on Roth contributions would be her MAGI.  Thankfully, that MAGI limit is higher for single Sue ($129,000 for 2022), and she could indeed make the full Roth contribution for 2022.

But what if Sue had gotten married and were “married filing jointly” tax status for 2022?  And what if she were marrying Barry Businessman, who separated from service in 2021 and had almost no income in his new business in 2022?  Maybe Sue and Barry could use a little more cash flow right now but still want to save for retirement.  Even though Sue is still covered by an employer plan, the deductible IRA contribution limit for married filing jointly is much higher, $109,000.  And the good news for Barry is for some time to come, he will be able to make tax-deductible contributions due to different IRS limits for those who are NOT covered by an employer plan.

But what if these IRS limits exclude us from ANY  kind of IRA contribution?

Is there some loophole?  I really want to save more!  (this is music to any CFP’s ears)

Yes, there is a loophole called a Backdoor Roth IRA.  If you are seeking to create more tax-free income in retirement but are a high-income earner with limited means of doing so, this could be a good strategy.  The simplest explanation of the process is:

  1. Make a non-deductible 2022 contribution to a Traditional IRA account.  This contribution should be reported in your 2022 tax return on Form 8606.  There is no MAGI limit or employer plan limitation for NON-DEDUCTIBLE contributions.  
  2. Do a “Roth conversion” of the contribution.  A Roth conversion refers to taking all or part of the balance of an existing traditional IRA and moving it into a Roth IRA.  This could be a taxable event if you have a balance in the Traditional IRA from previous deductible contributions.
  3. The IRA custodian will report the “recharacterization” on form 1099-R for the 2023 tax year.
  4. When you file your 2023 taxes, you will include the information from the 1099-R on good ole Form 8606 again.

NOTE:  this is an extremely simplified explanation of the Backdoor Roth.  Please discuss this option with your tax pro and/or financial planner before taking any action.

Whew, many details, lots of things to consider! If you need to talk this over with a financial professional, you can book a meeting HERE.

Happy savings!

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