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So, you want to save for retirement?
Making annual contributions to retirement accounts is one of the most effective ways of saving for life after your career. These accounts are designed to save you tax dollars, either now and/or over time, and they are the government’s way of incentivizing you to plan for retirement by making your saved dollar go further. All this fun comes with its share of constraints, though, and different retirement account types have different rules and regulations. With the end of 2020 fast-approaching, we will focus here on the deadlines and limits for one of the more commonly used account types – IRAs.
Deadlines: Traditional and Roth IRAs need to be established and funded by the year’s tax deadline. For example, to make a 2020 contribution to your IRA, the account needs to be opened by 4/15/2021; your contribution needs to be made by that date as well.
Limits: Traditional and Roth IRAs both have the same maximum annual contribution limit – $6,000 for 2020. This maximum applies to all your IRA accounts combined, so contributing to multiple accounts does not increase the annual maximum (but we like the way you’re thinking!).
Earned Income Limits: Your income also plays a role in what you can contribute and deduct.
You can only contribute to Traditional and Roth IRAs using earned income. See what the IRS considers earned income on their site linked here: IRS Earned Income
Simply put, this means if you have earned income of $3,000 in 2020, your maximum contribution for 2020 is $3,000.
Modified Adjusted Gross Income Limits: You can make too much money to be able to take full advantage of these accounts as well (lucky you!).
For traditional IRAs, if you are a single filer and your modified adjusted gross income (MAGI, your gross income with a few deductions added back in) is more than $65,000, you may only be able to deduct a portion of your contribution from your taxes. If your MAGI is $75,000 or more, you cannot deduct any of your contribution. If you file jointly, these limits increase to $104,000 and $124,000, respectively. While contributions are not deductible, it still might make sense to contribute to take advantage of the deferred investment income. The answer is not a one-size-fits-all, so be sure to talk it over with your advisor.
Roth IRAs are a bit different – if you file single and have MAGI over $124,000, you may only contribute a portion of the annual limit. MAGI of $139,000 or more and you are unable to directly contribute to a Roth at all. For joint filers, these amounts are $196,000 and $206,000, respectively.
In summary, navigating the ins and outs of retirement accounts can be tricky. You should consult your advisor to help you make smart decisions around your retirement accounts considering your unique situation. If you don’t yet have an advisor, the Glassman team is here to help!