Now is the time when many of us will file our tax returns. Unfortunately, once the calendar year ends there is little we can do to lower last year’s tax bill.
With one exception, that is.
The IRS allows taxpayers to fund their IRA up until April 15th of the following tax year or their tax filing date, whichever comes first. For some people this means you may be able to reduce your 2019 income tax bill by making a 2019 IRA contribution even though it’s now 2020.
Naturally, the IRS has some rules to follow.
All taxpayers under the age of 70 ½ can make a 2019 IRA contribution, if they have earned income (income you make by going to work at a job or your own business).
Note: the age limit of 70 ½ was repealed under the SECURE Act.
However, not all IRA contributions are tax deductible. To know if your IRA contribution is tax deductible ask yourself these questions:
Am I or is my spouse covered by a retirement plan at work? If you and your spouse are not covered by a retirement plan at work like a 401(k), 403(b), etc., then you may deduct the full amount of your IRA contribution on your tax return regardless of your income.
If either you or your spouse do have a retirement plan at work, the next question is: How much is my (our) Modified Adjusted Gross Income (MAGI) for 2019? In simple terms MAGI is your Adjusted Gross Income (AGI) plus certain deductions which are added back in. Most of the time, your AGI and MAGI are similar numbers.
Click here for a detailed definition of MAGI.
Married couples filing jointly:
If you are married and you have a retirement plan at work, you can deduct the full amount of your IRA contribution if you have a MAGI of up to $103,000.
If, as married couple, you make over $123,000 and you have a retirement plan at work, you may NOT deduct your IRA contribution.
If you are married and have a retirement plan at work and your MAGI lies between $103,001 and $122,999, may deduct part of your IRA contribution.
If your spouse has a retirement plan at work and you do not, you may deduct 100% of your 2019 IRA contribution if your MAGI is less than $193,000; a partial deduction if its between $193,001 and $203,000; no deduction if your MAGI exceeds $203,000.
For single people or head of household:
If you are single and you do not have a retirement plan at work, you may deduct 100% of your IRA contribution on your tax return regardless of your income.
If you are single and you do have a retirement plan at work, and your MAGI is under $64,000, you may deduct the full amount of your 2019 IRA contribution. If your income is $74,000 or more, you may NOT deduct your IRA contribution. Single taxpayers with incomes between $64,000 and $74,000, qualify for a partial deduction of their IRA contribution.
Maybe a chart would help.
Roth IRAs
Since Roth IRAs are funded with after-tax contributions, there is no tax deduction when you add to a Roth IRA. Taxpayers within certain income limits may contribute to Roth IRAs as long as they have earned income from a job or business.
If you don’t qualify to deduct a traditional IRA contribution from your taxable income, Roth IRAs offer an alternative. Some financial professionals might even say Roth IRAs have the edge since they are not subject to Required Minimum Distributions and the principal can be taken out of the IRA tax-free, at any time, for any reason.
For more information regarding IRA and Roth IRA contribution limits, click here.
Looking for a financial advisor who can help you cross the bridge to a confident retirement? Contact me at 651.379.3935 or email me directly at mpbranch@focusfinancial.com