If you have not made your 2019 IRA contribution yet, you are not alone. According to Fidelity Investments, the nation’s largest IRA provider, an increasing percentage of investors are making contributions to their IRAs during the last three weeks before the tax deadline -- this year, that deadline is July 15.
Due to the COVID-19 pandemic, both the IRA contribution deadline and the 2019 tax filing deadline were postponed to July 15. The July 15 date is good for this year only. Normally, the cutoff is April 15 for contributions for the prior tax year (and for filing your prior year’s tax return).
More than a third (34%) of tax season contributions came in right before the tax deadline in 2019, according to Fidelity. In May of this year, almost 51,000 clients made prior-year contributions to an IRA.
Let’s go over some IRA basics. For details, I highly recommend reading the official source: IRS Publication 590-A “Contributions to Individual Retirement Arrangements (IRAs) for use in preparing 2019 Returns” (tinyurl.com/jortqhl).
Starting in 2020, as long as you are still working, there is no age limit to be able to contribute to an IRA, thanks to the SECURE Act, which was signed into law in 2019. Before this change, the age cutoff was 70½. By the way, if you visit an IRA custodian website to do your research, be aware that some have not been updated to reflect this and other changes as a result of the CARES Act, which became law on March 27, 2020, and the SECURE Act.
Who can set up or contribute to an IRA? In general, anyone who earns money through a gig or a job can contribute to an IRA.
How much can you contribute to an IRA? The maximum you can contribute for 2019 is $6,000 ($7,000 if you are 50 or older).
What type of IRA is best? Most taxpayers have two choices: either a traditional IRA or a Roth IRA.
The important difference between the two types of IRAs has to do with taxes. Traditional IRAs are tax-deferred (meaning you pay taxes later when you start taking withdrawals). Deferrals don’t last forever -- withdrawals are mandated after age 72 (called “required minimum distributions,” or RMDs), and subject to severe penalties if not taken on time and in the right amount.
Roths are tax-free. That is, unlike the traditional IRA, “qualified distributions” are income-tax-free. Like the traditional IRA, no income taxes are triggered by income earned or capital gains realized during the time you own the IRA. Unlike traditional IRAs, the owner of a Roth IRA is not subject to RMDs (though beneficiaries of inherited Roth IRAs are subject to RMDs).
Can you get an income tax deduction? When you contribute to a traditional IRA, your contribution could be tax-deductible and also benefit from a tax credit, but only if you fall under IRS income limits. I must admit that I have to look up those limits every time I’m dealing with the subject, and I recommend you do the same. They change over time.
You’ll find both 2019 and 2020 limits in the most recent IRS Pub. 590-A (for 2019). The limits for deductibility are tied to your income and tax status (filing jointly with your spouse, filing separately, as head of household or individually), and whether you are covered by a 401(k) or other retirement plan at work.
There are also income limits on who can contribute to a Roth IRA, but as of a few years ago, there are no income limits that prevent you from converting from a traditional IRA to a Roth.
From my perspective as a personal money manager to high-net-worth families, I like to see people saving as much as possible -- maxing out their 401(k)s at work and their IRAs as well. While you are making your 2019 contribution, think about making your 2020 contribution as well, but be sure to notify your custodian of the tax year that applies to each contribution. The maximum you can contribute for 2020 is also $6,000 ($7,000 if you are 50 or older). That means if you haven’t done your 2019 contribution and wanted to maximize your savings, you could contribute a maximum of $6,000 per tax year ($12,000 for both years or $14,000 if you are 50 or older).
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Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (firstname.lastname@example.org). Please visit www.juliejason.com.
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