You now have until July 15 to file your federal income taxes. The new three-month extension also benefits retirement savers.
Taxpayers get more time to max out contributions to certain retirement and health accounts. They also have three more months to pay certain tax penalties from last year.
Here’s what to know.
More time to contribute
You get an extra three months to max out their annual contributions for the 2019 year, lowering your taxable income for 2019. This applies to those with an employer-based 401(k) or a traditional IRA, both of which are funded by pre-tax earning earnings.
Currently, the maximum limits for an annual 401(k) contribution are $19,500 in a given year while for IRAs they are $6,000. Those 50 and up can contribute up to an additional $6,500 to their 401(k) and $1,000 extra in their IRA.
“The IRA extension deadline, combined with the stimulus checks, can certainly help people boost their long-term savings,” said Jake Northup, certified financial planner at Experience Your Wealth LLC. “As long as your income hasn’t been affected and you have a sufficient emergency fund, you may want to consider contributing to your IRA accounts, especially with the market downturn we have experienced.”
The extra time also applies to SEP-IRAs used by self-employed taxpayers. Contributions to these accounts can’t exceed 25% of compensation or $56,000 for 2019, whichever is less.
“A physician client of mine was scrambling in an attempt to make a contribution to his SEP-IRA account for 2019, but with additional three months to contribute, he has a better chance of putting some funds that can still count for 2019,”said Henry Hoang, certified financial planner at Bright Wealth Advisors.
Americans also have more time to contribute to health savings accounts for the 2019 tax year. HSAs are a favorite retirement planning tool among personal finance experts.
An HSA is a tax-advantaged account. Withdrawals on eligible medical expenses are not taxed, and earned interest is tax-deferred or tax-free if used for medical costs. Funds not used during the year are rolled over to the next. HSA contributions are also deductible, reducing your taxable income.
Last, but key to retirement: If you still have an HSA when you hit 65, you can use the funds for any purpose, penalty-free.
More time to pay withdrawal penalties
Even before the coronavirus outbreak, almost half of working Americans have dipped into their retirement funds to cover unexpected expenses, buy a home, or pay for college tuition.
If you took out a withdrawal from your retirement account last year, there’s some good news for you, too. The 10% tax penalty you must pay is now due on July 15 — rather than April 15.