If You Aren’t Ready to Prepare Your Taxes, File an Extension

April 10, 2024

The deadline for most income tax filers falls on April 15th (or the next business day if April 15th falls on a Saturday, Sunday, or legal holiday). Therefore, you must complete returns postmarked by this date to avoid penalties.

However, if you cannot complete your return by April 15th, you can get an extension to give you more time to do so. Here’s what you need to know to file an extension.

ACTION ITEMS:

1. Obtain an automatic 6-month extension (until October 15), no reason needed.

File Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return
Estimate your full tax liability for the filing year using the information available to you
Enter your tax liability on line 4 of the form
File the form by the regular due date of your return

Tip: While Form 4868 gives you more time to file your return, it does NOT extend the time you have to pay taxes. If you do not pay the full amount of tax due on your return by the regular due date, you will also be subject to penalty and interest charges.

2. Understand the penalties associated with filing or paying late.

Paying late: If you fail to pay at least what you end up owing by the April deadline, even if you file for an extension, the late payment penalty is usually ½ of 1% of any tax (other than estimated tax) not paid by the regular due date. The IRS will charge you for each month or part of a month the tax is unpaid. The maximum penalty is 25%. The IRS may not charge the late payment penalty if you can show “reasonable cause” for not paying on time.

Filing late: You’ll usually get a late filing penalty if you either failed to submit the form for extension and filed after April 15th or filed after October 15th, no matter what. The penalty is usually 5% of the tax due for each month or part of a month your return is late. Generally, the maximum penalty is 25%. If your return is more than 60 days late, the minimum penalty is $435, or the balance of the tax due on your return, whichever is smaller. You might not owe the penalty if you have a good reason for filing late, so be sure to attach a statement to your return (not to Form 4868) fully explaining the reason.

Here’s more from the IRS on how all this works.

Is a Roth IRA the Wrong Tool for Emergency Savings?

December 08, 2016

I recently stumbled across this blog post called “The Emergency Roth Fallacy,” which criticizes me (along with a host of other financial writers) for advocating the idea of using a Roth IRA for an emergency fund. The basic idea is that since Roth IRA contributions can be withdrawn tax and penalty-free at any time and come out before earnings (which can be subject to taxes and a 10% early withdrawal penalty if withdrawn before 5 years or age 59 ½), you could use a Roth IRA as your emergency fund. Just be sure to keep it somewhere safe like a bank account or money market fund until you’ve built up sufficient emergency savings (at least enough to cover 3-6 months’ worth of necessary expenses) elsewhere. At that point, you can then invest the Roth IRA money more aggressively to grow tax-free for retirement. Let’s take a look at the criticisms:

“Who cares about saving taxes on an account earning 1%!?” I don’t know about you, but I try to save every penny I can from taxes. The bigger point is the opportunity you may have to invest that money later for a higher tax-free return. By funding the Roth IRA while you’re building your emergency fund, you avoid missing the opportunity to stick as much money in a tax-free account as possible.

“Money you withdraw can’t be put back.” Technically, you can put the money back within 60 days one time each year. It’s also no worse than not having contributed the money at all, which would be the alternative for someone who can’t afford to do both. However, I would go further and say that this is actually a benefit of using the Roth IRA as an emergency fund. That’s because the pain of withdrawing money that would otherwise grow tax-free can discourage people from withdrawing money for non-emergency purposes.

“It’s a complex solution to a non-existent problem.” First, the strategy isn’t for everyone. Many people do prefer the simplicity of a simple savings account for their emergency funds. On the other hand, I also know people who are reluctant to build up their emergency savings because they want to get as much money as possible into tax-advantaged accounts like the Roth IRA. This solution can solve that dilemma for them.

“It’s WAY too hands-on.” There are plenty of people (like yours truly) who are willing to take a few extra steps to optimize their finances. It can also be implemented by financial advisors for clients who prefer being more hands-off.

There are some additional benefits of a Roth IRA vs a regular savings account for an emergency fund. The fact that it’s designated as a retirement account and requires extra paperwork for withdrawals can discourage you from tapping into it for frivolous “emergencies.” Some institutions may pay higher interest rates on IRA accounts. Finally, some states provide more creditor protections to IRAs and IRAs avoid the time and cost of probate as long as there’s a living beneficiary.

None of that may matter to you. You may prefer the simplicity and convenience of a regular savings account. But for others, the Roth IRA can be a useful tool in helping them build and preserve emergency savings.

Did You Contribute Too Much to a Roth IRA?

March 09, 2016

Updated June 14, 2017

One of the downsides of the Roth IRA is that there are income limits that preclude high income earners from contributing to these accounts. But for people on the cusp or for those who unexpectedly end up earning more than they planned (or who get married during the year and only discover after the fact that they now exceed the limits), it’s actually quite common to find out after they file their income taxes that they were actually ineligible to contribute the year before.

Luckily, the IRS understands that this can happen so there are ways to fix it, but you have to take certain steps to minimize the tax consequences and avoid penalties. Here are your choices if you contributed to a Roth IRA and then found out later that you were ineligible for the contributions because you made too much money in the year of contribution: Continue reading “Did You Contribute Too Much to a Roth IRA?”

Roth IRA or Roth 401(k)?

February 18, 2016

We’ve recently received several calls on our Financial Helpline from people who entered their Roth 401(k) contributions as Roth IRA contributions in tax software and were told that they had over-contributed. Since Roth 401(k) plans are relatively new, it’s easy to get these mixed up but the differences are important and not just when filing your taxes. Let’s start with the similarities. Both accounts allow you to contribute after-tax dollars that can grow to be tax-free after age 59 ½ as long as you’ve had the account for at least 5 years. Now let’s look at the differences: Continue reading “Roth IRA or Roth 401(k)?”