This year, the Appropriations Act of 2020 has gone into place. This law includes numerous changes to tax law, including extending tax provisions that expired in 2017 or were approaching expiration, IRA and retirement plan modifications and other details that will affect many taxpayers. The IRA contribution changes are some of the most profound.
Past IRA Rules
Roth IRAs do not have age restrictions associated with contributions, but in the past, there was a cut-off at age 70 ½ for contributing to a traditional IRA. The primary reason for this was that Roth IRA contributions are not tax-deductible but traditional IRAs are. Unfortunately, this meant that older adults who worked after the age of 70 ½ could not contribute to their retirement through traditional IRA contributions any longer.
The Changes You Should Know About
Thanks to the new law, individuals who otherwise qualify to do so can contribute to a traditional IRA at any age. The current limits on contributions in 2020 are the lesser of the taxpayer’s compensation or:
- Taxpayers under 50: $6,000
- Taxpayers 50 or older: $7,000
Before you can contribute to a traditional IRA, you must be making some type of compensation. What can compensation include?
- Wages, tips, bonuses, professional fees, commissions
- Alimony received, if taxable
- Net income from self-employment
- Non-taxable combat pay
Compensation cannot include rental income, interest, dividends, nontaxable alimony, pensions, deferred compensation or disability payments. All traditional IRA contributions must be made by the due date (without extensions) of the tax return for the deduction year. For example, 2020 contributions need to be made before April 15, 2021.
If you are a higher-income taxpayer, the tax-deductibility of a traditional IRA will be phased out as your income increases. Once your income exceeds the upper limit, you will not be able to deduct any of your contributions. If you file as single, your deduction will phase out between $65,000 and $74,999. If you are filing jointly, your deduction will phrase out between $104,000 and $123,999. If you are married but filing separately, it will phase out between $0 and $9,999.
That limit changes to $196,000-$205,999 when you are making spousal contributions. Spousal IRAs are an option for married taxpayers filing jointly. If one spouse does not have compensation, the deduction is limited to the smaller of 100% of the employed spouse’s compensation or the annual limits. As a result, a nonworking spouse can make contributions based on their spouse’s compensation. You do not need to divide up spousal IRA contributions equally.
Tax Planning with Miles Tax Advisory
If you are ready to explore tax planning for next year or finish this year’s taxes, we are always here to assist you!