Taxpayers of all ages (assuming they have compensation) may be able to claim a deduction on their 2020 tax return for contributions to their Individual Retirement Account (IRA). There is no longer a maximum age for making IRA contributions, according to the IRS. While the age limit has been repealed, remember, compensation is still required to make an IRA contribution. Compensation includes wages, salaries and self-employment income.
With the recent announcement of the extension of the filing deadline to May 17, 2021, questions may arise as to when an IRA contribution must be made for tax year 2020. IRA contributions must be made by the due date for filing the taxpayer’s return, not including extensions. As of the time of writing this article, 2020 contributions are due by April 15, 2021. We’re waiting on further guidance from the IRS as to if this date is extended as well.
An IRA is designed to enable employees and the self-employed to save for retirement. Most taxpayers who work are eligible to start a traditional or Roth IRA, or add money to an existing account. Contributions to a traditional IRA are usually tax deductible, and distributions are generally taxable. There is still time to make contributions that count for a 2020 tax return.
If tax pros file their clients’ returns claiming a traditional IRA contribution before the contribution is made, the contribution must then be made by the filing deadline. Filing the return prior to making a contribution may be a good strategy for those close to the modified gross adjusted income (MAGI) limits, as then there are no issues with overcontributing to an IRA.
There is nothing wrong with contributing to a traditional IRA and filing the return after. In addition to making contributions to traditional IRAs, taxpayers are also eligible to make contributions to a Roth IRA. While contributions to a Roth IRA are not tax deductible, qualified distributions are tax-free. In addition, low- and moderate-income taxpayers making these contributions may also qualify for the saver’s credit (article available to NATP Premium and Professional level members only).
Generally, eligible taxpayers can contribute up to $6,000 to an IRA for 2020 and 2021. The annual contribution limit (for 2020 and 2021) for someone who was 50 years of age or older at year-end is increased to $7,000. The restrictions on taxpayers age 70½ or older to make contributions to their IRA were removed in 2020. If the taxpayer’s taxable compensation is less than these amounts, the limit is the taxable compensation. Contributions must be made in cash and the IRA contribution limits apply to the combined contributions of all of the taxpayer’s traditional and Roth IRAs.
__Here’s an example to further illustrate: __
Henry, age 45, contributes $6,000 to his Roth IRA. He cannot contribute to a traditional IRA. The reverse is also true. Henry can split the allowable contributions between the traditional and Roth IRA however he chooses. For example, he could contribute $2,000 to the traditional IRA and $4,000 to the Roth IRA.
Workplace retirement plans
Allowable contributions to traditional IRAs are always fully deductible if the taxpayer (and spouse, if married) is not an active participant in an employer-maintained retirement plan. What about if a taxpayer is covered by a workplace retirement plan?
For 2020, if a taxpayer is covered by a workplace retirement plan, the deduction for contributions to a traditional IRA may be reduced depending on the taxpayer’s MAGI:
As you can see in the chart above, single or head of household filers with MAGI of $65,000 or less can take a full deduction up to the amount of their contribution limit. For MAGI of more than $65,000 but less than $75,000, there is a partial deduction, and if $75,000 or more, there is no deduction.
A full deduction up to the amount of the contribution limit is permitted for filers who are married filing jointly or a qualifying widow(er) with $104,000 or less of MAGI. Filers with more than $104,000, but less than $124,000 of MAGI, can claim a partial deduction, and if their MAGI is greater than $124,000, no deduction is available.
For joint filers, where the spouse making the IRA contribution is not covered by a workplace plan, but their spouse is covered, a full deduction is available if their MAGI is $196,000 or less. There’s a partial deduction if their MAGI is between $196,001 and $205,999, and no deduction if their MAGI is $206,000 or more.
Filers who are married filing separately and have a MAGI of less than $10,000 can claim a partial deduction. If their MAGI is greater than $10,000, there is no deduction.
If the taxpayer (or their spouse) is an active participant in an employer plan and MAGI exceeds certain limits, the taxpayer cannot deduct the full amount of the IRA contribution and may not be able to deduct any of the contribution.
As the chart below indicates, allowable contributions to traditional IRAs are always fully deductible if the taxpayer (and spouse, if married) is not an active participant in an employer-maintained retirement plan. Limitations exist if the spouse is covered by a plan at work.
Worksheets are available in the Form 1040 Instructions or in Publication 590-A, Contributions to Individual Retirement Arrangements. The deduction is claimed on Form 1040, Schedule 1 (Line 19). Nondeductible contributions to a traditional IRA are reported on Form 8606.
Even though contributions to Roth IRAs are not tax deductible, the maximum permitted amount of these contributions begins to phase out for taxpayers whose MAGI is above a certain level:
- For filers who are married filing jointly or qualifying widow(er), that level is $196,000
- For those who file as single, head of household, or married filing separately and did not live with their spouse at any time during the year, that level is $124,000
- For filers who are married filing separately and lived with their spouse at any time during the year, and their MAGI is less than $10,000, a reduced amount can be contributed. If MAGI is $10,000 or more, nothing can be contributed.
For taxpayers who are eligible, a savers credit may be available for IRA contributions.
The saver’s credit, also known as the qualified retirement savings contributions credit, is often available to IRA contributors whose adjusted gross income falls below certain levels. In addition, beginning in 2018, designated beneficiaries may be eligible for a credit for contributions to their Achieving a Better Life Experience (ABLE) account. For 2020, the savers credit is as follows:
|Credit Rate||Married Filing Jointly||Head of Household||All Other Filers*|
|50% of your contribution||AGI not more than $39,000||AGI not more than $19,500||AGI nore more than $19,500|
|20% of your contribution||$39,001 - $42,500||$29,251 - $31,875||$19,501 - $21,250|
|10& of your contribution||$42,501 - $65,000||$31,876 - $48,750||$21,251 - $32,500|
|0% of your contribution||more than $65,000||more than $48,750||more than $32,500|
*Single, married filing separately or qualifying widow(er)
Form 8880, Credit for Qualified Retirement Savings Contributions, can be used to claim the saver’s credit.
Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.