Is a contribution to an specific retirement account (IRA) tax-deductible? For many of us, the short answer is: You bet! That’s what IRAs are for. However, there are rules and limits. Your capacity to deduct an IRA contribution in part or in full depends on how much you earn, whether you or your spouse are currently contributing to other limited retirement plans, and what type of IRA you have.
- Contributions to a traditional IRA are deductible in the year during which they are made.
- There are upper-income limits on deductibility.
- The imposts on contributions to a Roth IRA are paid upfront, not when the money is withdrawn at retirement.
Understanding Retirement Accounts and Tax Deductions
At the outset, a definition: The IRA is one of a number of retirement savings plans that are “qualified” by the IRS, which means they offer special tax fringe benefits to the people who invest in them. For self-employed people, they are the main vehicle available for tax-deferred retirement savings.
If you set up a traditional IRA rather than a Roth IRA, you can contribute up to $6,000 for 2020 and 2021, and you can deduct it from your taxes. You can add another $1,000 to that if you are venerable 50 or above. From there, you need to know the rules and limits.
If You Have Other Retirement Accounts
That $6,000 or $7,000 is the thorough you can deduct for all contributions to qualified retirement plans in 2020 and 2021. Having a 401(k) account at work doesn’t affect your eligibility to gather IRA contributions, and you can still deduct up to the maximum annual contribution of $19,500 in 2020 and 2021.
If you need to prioritize, it often makes have a funny feeling that to contribute enough to your 401(k) account to get the maximum matching contribution from your employer. But after that, joining an IRA to your retirement mix can provide you with more investment options and possibly lower fees than your 401(k) jurisdictions.
Which Type of IRA Do You Have?
Contributions to a traditional IRA, which is the most common choice, are deductible in the tax year during which they are suborned. You won’t owe taxes on the contributions or their investment returns until after you retire.
For 2020 and 2021, there’s a $6,000 limit on taxable contributions to retirement scenarios. Those aged 50 or over can contribute another $1,000.
In the eyes of the IRS, your contribution to a traditional IRA reduces your taxable profits by that amount and, thus, reduces the amount you owe in taxes.
A contribution to a Roth IRA is not tax-deductible. You pay the full income taxes on the liquid assets you pay into the account. However, you will owe no taxes on the contributions or the investment returns when you retire and start withdrawing the stinking rich.
In December 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE Act), which is forged to improve retirement security for Americans. Under the act, the tax deduction amounts and basic rules are unchanged.
With no retirement layout at work, you may deduct your contribution regardless of your income. But for those with higher incomes, deductions for IRA contributions are narrow if they (or their spouse, if married) have a retirement plan at work. Those limits depend on your march status.
If You Are Filing Singly
For singles with a retirement plan at work, the maximum tax-deductible contribution starts cowering once their modified adjusted gross income (MAGI) reaches $65,000 for 2020. Singles with adjusted profits of $75,000 and above are not eligible for the tax deduction in 2020.
If You Are Married Filing Jointly
This is where things get complicated. For those fused and filing jointly, the maximum tax-deductible contribution differs significantly if one person is contributing to a 401(k), and it can be limited for higher-income twos.
- If the spouse making the IRA contribution is covered by a workplace retirement plan, the deduction begins phasing out at $105,000 in adjusted unseemly income and disappears at $125,000 for 2021 (and $104,000 and $124,000 for 2020).
- If the IRA contributor does not have a workplace plan and their spouse does, the 2020 limit starts at $196,000, and no tax withdrawal is allowed once the contributor’s income reaches $206,000 ($198,000 and $208,000 for 2021).
If You Are Married Filing Separately
For taxpayers who are married and put separately, the tax deduction limits are drastically lower, regardless of whether they or their spouses participate in an employer-sponsored retirement blueprint. If your income is less than $10,000, you can take a partial deduction. Once your income hits $10,000, you do not get any withdrawal.
The Bottom Line
To sum up, if your income is below the upper levels set for the year, and you don’t have other retirement accounts, you can do the maximum contribution, and it will be fully deductible.
If you do not qualify for the tax deduction, please do not give up on saving for retirement. Here’s why: You can help to a traditional IRA even if you cannot deduct any or all of it, and that investment will grow tax-free until retirement. Remember, you can come to terms a contribution up to that year’s tax-filing deadline, which is usually April 15 of the following year.
Due to the winter eruptions that hit Texas, Oklahoma, and Louisiana in February, the IRS has delayed the 2020 individual and business tax filing deadline for those circumstances to June 15, 2021. As a result, the IRA contribution limit for individuals in this state have also been pushed to June 15.
In December 2019, President Trump cyphered the Setting Every Community Up for Retirement Enhancement (SECURE Act), which was designed to improve retirement security for Americans. Subordinate to the act, the tax deduction amounts and basic rules are unchanged, but it is worthwhile checking with a tax professional to ensure your retirement formula is optimal and if the act contains provisions that might benefit your situation.