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Prior-year contributions can be a valuable tool for retirement investors, especially those using a Self-Directed IRA (SDIRA). Each year, the IRS allows individuals to make contributions for the prior tax year up until the tax filing deadline, generally April 15. While the rule itself seems straightforward, the details often create confusion. Many investors unintentionally overlook important steps that affect compliance, IRS reporting, and investment timing.
Below are the most common things SDIRA investors miss when making prior-year contributions and how to avoid them.
This rule is often misunderstood. IRS guidance states that a mailed check postmarked by the tax filing deadline counts as a timely IRA contribution, even if the custodian receives it later. This is known as the IRS “timely mailing equals timely filing” mailbox rule.
This means:
Mountain West IRA follows the IRS rule: a mailed check postmarked by the tax filing deadline counts as a timely IRA contribution, even if it arrives after the deadline.
Clients who anticipate upcoming investment activity may find it helpful to contribute earlier to ensure funds are in the account when needed, but the timing of any contribution is entirely up to the individual.
Many investors mistakenly assume that moving money from one custodian to another counts as a contribution. It does not. A contribution is new money from earned income and counts toward your annual IRA contribution limit. A rollover or transfer does not count toward your contribution limit and is not treated as a prior-year contribution.
Only actual contributions qualify for prior-year designation.
If no tax year is specified, IRA custodians are required to treat the contribution as a current-year deposit. This can lead to reporting issues, over-contributions, or missed tax benefits.
Be sure to clearly indicate whether your deposit should be applied to the current year or the prior year. At Mountain West IRA we have a Contribution Form you can use to designate if your contribution is for the current year or for the prior year. You can download a PDF, or you can complete the form right online.
For Traditional and Roth IRAs, the contribution deadline is typically April 15. However, SEP IRAs operate differently. SEP contributions may be made, up to the employer’s tax filing deadline, including extensions, which can be as late as September or October.
This extended timeframe gives self-employed investors additional flexibility when planning retirement contributions or timing SDIRA investments, but it applies only to SEP IRAs, not Traditional or Roth IRAs.
A prior-year contribution is permitted only if you had eligible earned income for the tax year to which the contribution applies. Passive income such as rental income, dividends, or interest does not qualify as earned income for IRA contribution purposes. This becomes particularly important for retirees, investors living primarily off passive income, or business owners with fluctuating revenue.
In some cases, a spousal IRA may still allow a contribution, but the rules must be followed carefully.
SDIRA investors who hold alternative assets often assume a prior-year contribution increases the fair market value (FMV) for that year. It does not. The FMV is reported based on values as of December 31 of the prior year. Contributions made the following year do not change that reported amount.
This matters for RMD calculations, Roth conversion planning, and IRS reporting accuracy.
Investors using Self-Directed IRAs are often planning to move quickly into real estate, notes, private placements, precious metals, or LLC structures. These alternative assets frequently require document review, processing, or additional compliance steps. Waiting until the last minute to fund your IRA can delay your investment timeline, especially if the opportunity has its own deadlines.
It is easy to accidentally exceed the annual contribution limit. This often happens when investors:
Over-contributions require correction and can incur IRS penalties if not resolved promptly. Mountain West IRA will notify you if an attempted contribution exceeds the limits for the accounts we administer. However, we do not have visibility into contributions made to retirement accounts held outside of our institution. For that reason, it is important to track your total annual contributions and consult with your CPA or financial planner to ensure you remain within IRS guidelines and compliant with applicable contribution limits.
Prior-year contributions can be an excellent opportunity to enhance your retirement planning, but the rules can be nuanced, especially when alternative assets are involved.
Mountain West IRA is a neutral third-party administrator. We do not recommend, endorse, or sell any investments. All clients are responsible for performing their own due diligence, understanding risks, and ensuring an investment is appropriate for their retirement strategy. Before making any contribution or investment decision, always consult your CPA, financial advisor, or tax professional to ensure compliance with IRS rules and proper reporting.
Mountain West IRA can help you open a Self-Directed IRA or Solo 401(k), so you can invest in what you know best.
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This post is for informational purposes only and should not be considered financial advice. Please consult with a financial advisor for personalized advice.
Mountain West IRA, Inc. does not render tax, legal, accounting, investment, or other professional advice. If accounting, tax, legal, investment, or other similar expert assistance is required, the services of a competent professional should be sought.
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