For various reasons, saving for retirement may not have been a top priority for you in 2020. But with the IRS extending the Federal tax filing deadline for 2020 to May 17th, you now have an additional month to make a 2020 contribution into your Individual Retirement Arrangement (IRA). If you would like to contribute into an IRA and are unfamiliar with the rules, here are six things you should know.
#1 What are the two Types of IRAs you can contribute to?
Contributions might be tax deductible and your investment returns are not taxed until you withdraw the money in retirement. Withdrawals are taxed as ordinary income.
Contributions are not tax deductible as they are made “after-tax”. Your investment returns grow tax free. Withdrawals are made tax-free.
#2 What are the requirements to contribute to an IRA?
For both a traditional and Roth IRA you must have earned income in order to contribute into an IRA. Earned income includes wages from salary, commissions, bonuses, tips, and self-employment income.
For a Roth IRA, the amount of your contribution is phased out when your adjusted gross income is between $124,000 and $139,000 if you are single or $196,000 and $206,000 if you are married.
If you are married and your spouse did not have any earned income in 2020, they can make a "spousal" IRA contribution in their own IRA as long as you, the working spouse, meet the income requirements.
#3 How much can you contribute into an IRA?
You can contribute up to the lessor of your earned income or $6,000 in 2020. This amount can be spread out between a Roth and a traditional IRA but your total contributions in your IRAs cannot exceed the lessor of your earned income or maximum limit of $6,000.
If you are 50 years or older, you are able to make an additional “catch-up” contribution of $1,000.
#4 When is your traditional IRA contribution tax deductible?
If you (and your spouse if you are married) are not covered by an employer sponsored retirement plan (e.g. 401K, 403b Plan), your IRA contribution is fully tax deductible.
If you are married and you are not covered by an employer sponsored retirement plan but your spouse is, then your tax deduction decreases when your adjusted gross income is between $196,000 and $206,000.
If you are single and you are covered by an employer sponsored retirement plan then your tax deduction decreases when your adjusted gross income is between $65,000 to 75,000.
If you are married and both of you are covered by an employer sponsored retirement plan then your tax deduction decreases when your adjusted gross income is between $104,000 and $124,000 if you are married.
#5 When is the deadline to make an IRA contribution?
You have until the Federal tax filing deadline to make a contribution for the current tax year. This year, the tax filing deadline is May 17th. This means you have until this date to make a contribution for the 2020 tax year.
#6 Which IRA is better for you?
If your goal is to reduce your taxes today and you qualify to make a tax deductible contribution into a traditional IRA, then a traditional IRA might be a better choice for you.
If your goal is to have tax-free income in retirement and you qualify to make a Roth IRA contribution, then a Roth IRA might be a better choice for you.
You don’t necessarily have to choose one or the other. You can contribute to a Roth IRA and a Traditional IRA as long as you meet the income requirements and your total combined contribution does not exceed the maximum limit of $6,000 or $7,000 if you are over 50.
Contributing to an IRA is a great way to save for retirement. The good news is that you have until May 17th to make a contribution for the 2020 tax year. If you are feeling flush with cash due to your stimulus payments, you can put your extra money to good use by putting money away in an IRA.
Here is a useful calculator that will help you determine how much you can contribute into an IRA: IRA Eligibility Calculator
This content is developed from sources believed to be providing accurate information, and provided by Attune Financial Planning. The opinions expressed and material provided are for general information only. Please consult your financial, tax, and estate planning professional regarding your specific situation.