Even though tax filing season is well underway, you may still make a regular IRA contribution for the prior year until your tax return filing date (not including extensions). You may contribute up to $6,000 for 2020 or $7,000 if you were age 50 or older on or before Dec. 31, 2020.
A frequent question is, Can I contribute to both an IRA and a 401(k)? The answer is yes, but the deductibility of the contribution will depend upon your tax filing status and income level. For a single filer in 2020 with income up to $65,000, you would be eligible for a full deduction and a partial deduction up to $75,000.
Married filing jointly with income up to $104,000 would be eligible for a full deduction and a partial deduction up to $124,000. If you are married filing jointly and your spouse has a 401(k), you may each be eligible for a full deduction with income up to $196,000 and a partial deduction up to $206,000. 2021 income levels will increase slightly.
A traditional IRA is deductible in the year of contribution and taxable when distributed. A ROTH IRA is non-deductible but both your original contribution and any growth is non-taxable when distributed.
Your eligibility to contribute to a ROTH IRA also has income limitations. Single with income up to $124,000 can make a full contribution with reduction of contribution for incomes between $124,000 and $139,000 and eliminated for incomes over $139,000. Married filing jointly can make a full contribution with income up to $196,000, with a reduction of contribution for incomes between $196,000 to $206,000 and eliminated for incomes over $206,000. Married filing separately is limited and completely eliminated for incomes over $10,000. An additional benefit of a ROTH IRA is that unlike a traditional IRA there are no required minimum distribution (RMD) requirements.
Even if you can’t make a contribution to a ROTH IRA because of income limits, there is an easy workaround known as a back door ROTH IRA. You make a non-deductible contribution to a traditional IRA and immediately convert that traditional IRA to a ROTH IRA. This conversion will be a taxable event at the time of conversion.
For self-employed individuals, you may be eligible to contribute up to 20 percent of your income up to $57,000 for 2020 in a SEP or an Individual (K) also know as a Solo (k). These plans can be funded up to the due date of your tax filing plus extensions.
Previously, taxpayers who were 70 1/2 years of age or older could not contribute to a traditional IRA, but as of Jan. 1, 2020 this age limit no longer applies. Since people are living longer and working longer this greatly helps individuals save toward retirement. Work with a financial advisor to create a plan design that suits your current and future needs.
The above is the opinion of the author and should not be relied upon as investment advice or a forecast of the future. It is not a recommendation, offer, or solicitation to buy or sell any securities or any investment strategy. It is for informational purposes only. The above statistics, data, anecdotes and opinions are assumed to be true and accurate. Grand Canyon Wealth Management does not warrant the accuracy of any of these.
Michael J. Day, CPA, PFS™ is the founder of Grand Canyon Wealth Management, where he provides financial planning, wealth management and investment services. For more information, or to schedule a complimentary consultation, visit grandcanyonwealthmanagement.com, call (480) 590-3590 or e-mail Michael.j.day@lpl.com.
You may also follow him on Twitter @GrandCanyonWM. Securities and advisory services provided through LPL Financial, a registered investment advisor member FINRA/SIPC. Grand Canyon Wealth Management is not an affiliate company of LPL.