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Time is running out! The tax filing deadline is Tuesday, April 18. Why is this important? Because that is the last day an IRA can be opened and/or funded for the previous year. Even if a taxpayer files for an extension, that does NOT extend the prior-year IRA contribution deadline. With that in mind, here are 5 reasons to stop procrastinating and open a Roth IRA immediately:
1. Get Your Clock Started. As mentioned, the deadline for making a prior-year (2022) contribution to a Roth (or traditional) IRA is April 18, 2023. If you already filed your taxes, you can still make a 2022 Roth IRA contribution without having to amend your return. So get it done! Even if the contribution is for a small amount, like $100, that will still start your Roth IRA 5-year clock ticking. And if you designate the contribution for 2022, you get a January 1, 2022 start date! Your 5-year clock just became a 3-year, 9-month clock.
2. The Magic of Compounding. The longer money has to grow within your Roth IRA, the more tax-free earnings you stand to accumulate. And if more accumulates now, then more can potentially compound on top of that. Albert Einstein famously said, “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn't…pays it.” Another popular saying is, “It’s not about TIMING the market, it’s about TIME IN the market.”
3. Roth 401(k) Destination. If you have a Roth 401(k) and plan to roll it over to a Roth IRA at some point in the future, you will need to open a Roth IRA. But if you never had a Roth IRA, and if you wait until the last minute to establish the account to accept your rollover, your 401(k) dollars will adopt the 5-year clock of the Roth IRA. Yes, qualified plan distributions that can soften this blow, but why wait? Establish a Roth IRA now for any future Roth 401(k) rollovers.
4. Leverage a Conversion. You make too much money to contribute to a Roth IRA? Well, there are NO income limits on Roth conversions. Anyone with a traditional IRA is eligible to do a Roth conversion. It does not matter if you make zero dollars or a million. It does not matter if you participate in a work plan or not. Yes, a conversion is taxable and will add to your earned income for the year, but all future growth is tax-free! Also, a Roth conversion starts your initial 5-year clock just like a Roth IRA contribution. Only difference is a Roth conversion cannot be labeled as a “prior-year conversion.” You will receive a January 1, 2023 start date…but at least your Roth IRA will be off and running.
5. Roth IRA Distribution Ordering Rules. I don’t want to hear any excuses about “locking up my money” or “what if there is a financial emergency?” Roth IRA distributions follow strict ordering rules. Contributions come out first, then converted dollars, then earnings. A person always has access to their Roth IRA contributions tax-and penalty-free. Converted dollars are available after 5 years regardless of how old you are. If there is a true emergency, there is a good chance a portion of your Roth IRA will be available for withdrawal, no strings attached.
The time is now! Only a few days left to lock in a January 1, 2022 start date with a Roth IRA contribution. No more procrastination. No more excuses. Get it done.
Copyright © 2023, Ed Slott and Company, LLC Reprinted from The Slott Report, Wednesday, April 12, 2023, with permission. https://www.irahelp.com/slottreport/5-reasons-open-roth-ira-immediately. Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.