Should You Make Prior-Year IRA Contributions?

Tax Day is right around the corner but there are still ways to take advantage of tax benefits for the previous year, such as with prior-year contributions to IRAs. The IRS allows certain earners to make contributions that count toward the previous year’s taxes, allowing them to maximize certain benefits and save more for retirement. Learn more about prior-year contributions, eligibility requirements, and key benefits you may be able to leverage.

Who Can Make Prior-Year Contributions?

Certain earners can make contributions until Tax Day, April 15, that apply to the previous year’s taxes. For example, for 2025, you can make prior-year contributions that apply to the 2024 tax year based on the following criteria:

• You’ve yet to file 2024’s taxes
• You fall within certain income thresholds
• You haven’t contributed to an IRA in the previous year or reached the annual IRA contribution limits of $7,000 or $8,000 if you’re over 50 (Note that these are totals per taxpayer, not per account.)
• You’ve maxed out your 401(k) contributions for 2024 ($23,000 or $30,500 for those over 50) and want more ways to save

Additionally, you may consider prior-year contributions if:

• You have excess income and want to boost your retirement savings
• You want to reduce required minimum distributions (RMDs) by contributing to a Roth IRA

What Are the Benefits of Prior-Year Contributions?

Eligible traditional IRA contributions may:

• Reduce your taxable income through an upfront partial or full deduction against adjusted gross income (AGI) 
• Prevent pushing you into a higher tax bracket
• Provide long-term tax-deferred compounded growth potential

Saving in a Roth IRA can help you reduce RMDs. All contributions maximize your retirement savings for long-term and tax-free compounded growth.

How Does the New SECURE Act 2.0 Affect Prior-Year Contributions?

Automatic Roth 401(k) Enrollment: Beginning in 2025, employers must automatically enroll employees in a Roth 401(k) as part of the SECURE Act 2.0. While employees may opt out of the feature, it can provide additional opportunities to save tax-free funds for retirement.

• Roth 401(k)s have no income cap, unlike Roth IRAs.
• The annual contribution limit for a Roth 401(K) in 2024 was $23,000, with an additional catch-up contribution of $7,500 for those over 50. This could provide significant savings if you also max out your IRA contributions for the prior year.
• Roth 401(k)s no longer require RMDs during your lifetime.

What Are the Pitfalls of a Roth 401(k)?

While this provision encourages more saving, there are some potential pitfalls to keep in mind:

• Roth 401(k) contributions are immediately taxed. While Roths provide long-term benefits, such as tax-free growth, employees and those approaching retirement may wish to defer taxes with a traditional 401(k) rather than reduce their net income now.
• Automatic enrollment may be too low or high. Employees must understand how much they should save for retirement. If the default deferral percentage is too low, it may not provide enough to save in the long term.
• Employees may “set and forget” their default enrollment: It’s still essential to take an active approach to saving for retirement and implement various savings and diversification strategies to reach their goals.

In these situations, education and engagement are critical to ensuring a successful plan. You can work with a CPA, financial advisor, or your HR team to understand how Roth 401(k)s work, how to maximize their benefits, and whether they’re right for you.

How Can a CPA Help You Make Prior-Year Contributions?

We encourage you to work with a professional before Tax Day to accurately apply prior-year contributions and understand how new tax laws may impact your strategy. A CPA or financial advisor can walk you through various scenarios, including:

• If you’re eligible for prior-year contributions and a full or partial traditional IRA deduction
• If you should consider a backdoor Roth strategy if your income is too high to contribute directly to a Roth IRA 
• How contributions may affect your refund or tax liability
• If a traditional or Roth IRA is right for you, depending on your tax situation and goals
• Other ways to reduce your taxable income and save for the future, such as prior-year contributions to an HSA or profit-sharing plan if your company provides one
• Strategies specific to those who are self-employed

There are various ways to manage taxes while saving for the future but understanding tax strategy and new laws is essential. We recommend reviewing these topics with your CPA or financial advisor to understand what opportunities you can leverage. Contact us if you have questions or would like to discuss your situation in depth.

Disclaimer: This blog is for informational purposes only and not intended to provide tax advice. Please consult your CPA or tax professional for personalized guidance.