The Roth IRA contribution deadline for 2010 isn’t as fast approaching as you might think. You’re allowed to contribute towards the 2010 limit until you file your taxes or April 18, 2011, whichever comes first.
Why Is The Roth IRA Contribution Deadline Important?
A Roth IRA is one of the best vehicles for savings available. You put after-tax savings into your Roth IRA. The contributions and earnings grow tax free. . Even better, if you follow the rules, the contributions and earnings are withdrawn tax free.
To show you the power of tax free growth, the table below shows the difference between investing in a taxable account vs. a Roth IRA.
Roth IRA vs. Taxable Account
| Taxable | Roth IRA | |
|---|---|---|
| Begin | 22 | 22 |
| End | 60 | 60 |
| Yearly Contribution | $5,000 | $5,000 |
| Marginal Tax Rate | 25% | |
| Yearly Rate of Return | 10% | 10% |
| TOTAL | $1,047,356 | $2,002,239 |
Also, as a Gen Y’er, there might be only a few years left that you’re qualified to contribute to a Roth IRA. The IRS phases out contributions for individuals with an income over $105,000 in 2010 ($167,000 if you’re married). With a little hard work, you may be making over this soon.
Should I Start A Roth IRA or a 401K?
One reason, you might choose to invest in a 401K over a Roth IRA, is that your employer matches contributions. If you haven’t contributed up to your employer match, you’re better off investing in a 401K if that’s all you can do.
If you are contributing up to your employer’s match in your 401K and are looking to save more, a Roth IRA is a great place to invest. (For help on where to invest, I created an asset location flowchart). Reasons for investing in a Roth IRA instead of your 401K include:
- IRA’s are more mobile. You don’t need to rollover an IRA. It’s yours, no matter your job.
- IRA’s allow you to pick the investments. In a 401K, the employer provides the investments for you.
What If I File for an Extension?
If you file for an extension, the Roth IRA contribution deadline for 2010 is still April 18, 2011.
Can I Start a Roth IRA Today or Just Contribute?
You can start a new Roth IRA and make your first contributions for the previous year or contribute to an existing IRA. If you haven’t started a Roth IRA, read how you can in 20 minutes. It’s easy!
Over Achievers Only
If you have the money, a great way to start the year is by maxing out your Roth IRA on January 1st. Unlike 401(k)s, you can withdraw your contributions at any time without penalty in a Roth IRA. If you continue to max out your Roth IRA on the first of every year, your contributions will have more time to compound.
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{ 3 comments… read them below or add one }
I think you’re incorrect on your dates for Roth IRA contributions. You can contribute to your 2010 Roth IRA until April 18, 2011, notwithstanding the date you file your taxes. http://www.irs.gov/publications/p590/ch02.html#en_US_2010_publink1000231022
Seth – Your right. I believe I wrote that before the IRS deadline was set. Generally it falls on the 15th. Was moved to the 18th this year.
Thanks again.
My husband and I have fully invested in our 401k and Roth IRA accounts for 2010 and are making progress on doing the same for 2011- but my question is this: If we max out on our roth IRA contributions now but then need to withdraw that money for whatever reason – are we allowed to repay that money as long as it’s within the current tax year? I know that we can withdraw it without any penalties, but can it put back in the account? Or is it counted as additional contribution for that tax year?