Aside from being the day your taxes are due, April 15th of each year marks the cutoff for IRA contributions for the previous year. And I’m here to tell that if there’s anyway possible that you might have the money to contribute to a Roth IRA before the deadline in any given year, then you should seriously think about it. You see, contributions to Roth IRAs can be withdrawn at any time, for any reason, without taxes or penalties. Don’t believe me? Check out IRS Publication 590 for details. In general terms, the ability to pull money out of a retirement count on whim might be a bad thing. After all, you don’t want to be able to raid your retirement to buy that new Jet Ski, do you? But the ability to pull your money out of a Roth does give you the flexibility to hedge your bets and make that contribution even if your not sure that you can afford it right now.
Since you can only contribute a limited amount per year, saavy savers shouldn’t pass up an opportunity to stuff their IRAs full of money. Of course, you need to make sure that you don’t lock up dollars that you’ll end up needing — it’s always good to have money socked away in a rainy day account. And therein lies the beauty of the Roth IRA contribution/withdrawal rules. Go ahead, make that contribution and think about it later. If it turns out that you car doesn’t break down, you don’t lose you job, and nobody in your family gets sick (or worse) before you have a chance to rebuild you rainy day fund, then you’ve just come out way ahead. And if the worst does happen, you can always yank that money back and put it toward whatever emergency just came up.
A few things to watch out for:
(1) Make sure you do this with a Roth IRA, not a Traditional IRA. The withdrawal rules are different between the two.
(2) Make sure you don’t exceed you contribution limits. The IRA limits are for the combined total of Roth and Traditional contributions. Thus, if you’ve already contributed to a Traditional IRA, you’ve effectively reduced (or even reached) your limit.
(3) Make sure that a Roth is right for you. In general terms, if you expect to pay the same or higher taxes at retirement than you do right now, then a Roth probably makes sense. If you expect your tax burden to fall, however, it might be better to contribute to a Traditional IRA (assuming that you qualify for the deduction). Here again, keep in mind that the Traditional IRA doesn’t offer the same level of flexibility.