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Traditional IRAs
IRA Contribution Limits—2020
Lesser of: Taxable compensation for the year, or:
Under age 50 ……………………………………………………………………… $6,000
Age 50 or older……………………………………………………………………. $7,000
What is an IRA?
An IRA is an individual retirement arrangement. It is a personal savings plan that gives you tax advantages for setting aside money for retirement. An IRA is referred to as a traditional IRA if it is not a Roth IRA or a SIMPLE IRA. Traditional IRAs include SEP IRAs.
Traditional IRA tax advantages and rules:
- Contributions to an IRA may be fully or partially deductible.
- Amounts in your IRA (including earnings and gains) are not taxed until distributed.
- There is no limit on how much you can earn and still contribute (however, contributions are not deductible above certain amounts).
- Required minimum distributions begin after age 70 1/2.
- Early distributions (before you are age 59 1/2) are subject to a 10% additional tax. exceptions apply.
- Distributions are taxed as ordinary income.
Who can contribute to an IRA?
Any individual can set up a traditional IRA if he or she receives taxable compensation during the year. An individual can have a traditional IRA even if covered by an employer-sponsored retirement plan. However, the deductible amount of contributions to a traditional IRA may be phased out. See Reduced IRA Deduction, later.
Compensation for IRA Purposes:
Includes:
- Wages, salaries, tips, professional fees, bonuses, and other amounts received for providing personal services.
- Commissions.
- Self-employment income.
- Nontaxable combat pay.
- Alimony and separate maintenance payments received.
- Taxable scholarship and fellowship payments are compensation for IRA purposes (if shown in box 1 of Form W-2).
Does Not Include:
- Earnings and profits from property, such as rental income.
- Interest and dividend income.
- Pension or annuity income.
- Deferred compensation.
- Income from certain partnerships.
- Conservation Reserve program (CRP) payments.
- Any amounts (other than combat pay) excluded from income.
Contribution limit. Contributions to IRAs are limited to the lesser of the individual’s compensation (or spouse’s compensation under a spousal IRA), or $6,000 ($7,000 for age 50 or older).
Total contributions are combined with Roth IRA contributions to determine limits. For example, a $1,000 contribution to a Roth IRA will reduce total contributions allowable to a traditional IRA by $1,000.
Spousal IRA. If both spouses have compensation, each can set up a separate IRA. Spouses cannot participate in the same IRA. If filing status is Married Filing Jointly and one spouse’s compensation is less than the contribution limit, the lower-income spouse can use the compensation of the other spouse to qualify. However, the spousal IRA is limited to total compensation reduced by any IRA contributions.
This means that the total combined contributions that can be made for the year to your IRA and your spouse’s IRA can be as much as $12,000 ($13,000 if only one of you is age 50 or older or $14,000 if both of you are age 50 or older).
When Can You Make Contributions?
Contributions to an IRA can be made at any time during the year or by the due date of your return for that year (not including extensions). This means that most people can make contributions for 2020 by April 15, 2021.
How Much Can You Deduct?
Generally, you can deduct the lesser of:
- The contributions to your traditional IRA for the year, or
- The general limit (or spousal limit) for the year.
However, if you or your spouse is covered by an employer retirement plan, you may not be able to deduct this amount.
Covered by an employer retirement plan. If you or your spouse was covered by an employer retirement plan at any time during the year for which contributions were made, your deduction may be limited. Limits on the amount you can deduct do not affect the amount that can be contributed. Box 13, Form W-2, will be checked if you are covered.
Reduced IRA Deduction
Subject to whether you or your spouse was covered by an employer retirement plan, you may be entitled to only a reduced (partial) deduction or no deduction at all, depending on your modified adjusted gross income (MAGI) and filing status.
MAGI. MAGI for IRA purposes is your adjusted gross income (AGI) from line 8b, Form 1040, plus any traditional IRA deduction, student loan interest deduction, foreign earned income or housing exclusion, U.S. Savings Bond interest exclusion, or employer-provided adoption benefits exclusion, or tuition and fees deduction.
2020 IRA Phaseouts – Taxpayer Covered by a Retirement Plan at Work
Filing Status – Single or Head of Household:
MAGI: $65,000 or less = A full deduction allowable
MAGI: More than $65,000 but less than $75,000 = A partial deduction allowable.
MAGI: $75,000 or more = No deduction allowable.
Filing Status – Married Filing Jointly or Qualifying Widow(er)
MAGI: $104,000 or less = A full deduction allowable.
MAGI: More than $104,000 but less than $124,000 = A partial deduction allowable.
MAGI: $124,000 or more = No deduction allowable.
Filing Status – Married Filing Separately (use Single if you did not live with spouse at any time during the year)
MAGI: Less than $10,000 = A partial deduction allowable.
MAGI: $10,000 or more = No deduction allowable.
2020 IRA Phaseouts – Neither Covered by Retirement Plan at Work
Filing Status – Single, Head of Household, or Qualifying Widow(er)
MAGI: Any amount = A full deduction allowable.
Filing Status – Married Filing Jointly or Married Filing Separately
MAGI: Any amount = A full deduction allowable.
2020 IRA Phaseouts – Taxpayer Not Covered, but Spouse Covered by Retirement Plan at Work
Filing Status – Married Filing Jointly
MAGI: $196,000 or less = A full deduction allowable.
MAGI: More than $196,000 but less than $206,000 = A partial deduction allowable.
MAGI: $206,000 or more = No deduction allowable.
Filing Status – Married Filing Separately (You are entitled to a full deduction if you did not live with your spouse at any time during the year).
MAGI: Less than $10,000 = A partial deduction allowable.
MAGI: $10,000 or more = No deduction allowable.
Required Minimum Distribution (RMD)
The RMD is the minimum amount that you must withdraw each year upon reaching age 72. You may withdraw more than the minimum required amount. The withdrawals will be included in taxable income except for any part that was already taxed or can be received tax free.