Tax Tip - Your Small Assignment for Today
Editor's Note: This article is part of our 2014 Tax Tips series. Robert Flach is an expert with more than 40 years of experience as a tax professional and also blogs as The Wandering Tax Pro.
NEW YORK (MainStreet) Happy New Year!
Today is the first business day of the New Year. The first thing you should do once you finish the word day is make your 2014 contributions to your traditional or ROTH IRA, Coverdell Education Savings Account, Section 529 College Savings Plan and/or Health Savings Account!
Thanks to the miracle of tax-free compounding, by making your contribution as soon as possible in the beginning of each year you will have substantially more in the account by the time you are ready to retire, or when you need the money to pay for education or medical bills, than if you wait till the last minute.
If you make a contribution to a ROTH IRA for 2014 today and later find out that you are not eligible for a ROTH, or, for whatever reason, decide you would rather have the funds in a traditional IRA, you have until the due date of your 2014 Form 1040, including extensions - as late as October 15, 2015 - to "recharacterize" the contribution.
When making a contribution to any tax-deferred account, you must be sure to identify the year for which it is being made. Write "2014 contribution" clearly in the memo section of the check. If you enclose a payment voucher or coupon provided by the trustee make sure the correct year is marked. Follow up by checking the next statement for the account to verify the contribution was applied to the right year. This will avoid potential problems with the IRS down the road.
Written by Robert D. Flach for MainStreet