An Individual Retirement Account, known as an IRA, allows anyone to save for retirement while earning an income. The main reasons for contributing to an IRA are:
- You may get a tax deduction on contributions.
- Account grows tax-deferred, meaning you don’t have to pay taxes on the account as long as you don’t withdraw any money from it.
Since the contribution amounts, income limits, and other regulations for Traditional IRAs change almost every year, I thought it would be a good time to review the current rules.
Here we go:
Eligibility
Anyone who has earned income can contribute to an IRA. According to the IRS, earned income includes all income from employment, but only if it is includable in gross income. Examples of earned income are wages; salaries; tips; and other taxable employee compensation. Earned income also includes net earnings from self-employment. Rental income and capital gains are not considered earned income.
Contribution Limits
The maximum annual contribution limit for 2020 is $6,000 (or $7,000 if you’re age 50 or older).
Income limits on Tax Deductibility of Contributions
Contributions may be tax-deductible in the year they are made. I say maybe because, although you’re always able to contribute the full amount, you may not be able to deduct all of your contributions.
First off, if neither you nor your spouse are covered by a retirement plan, like a 401k, at work, you can deduct 100% of your contributions regardless of how much money you make.
It gets tricky if either you or your spouse have a retirement plan at work. Here is a table that summarizes the income limits when you and/or your spouse are covered by a retirement plan at work:
| Filing Status | Modified adjusted gross income (MAGI) | Deduction Limit |
| Single individuals | ≤ $65,000 | Full deduction up to the amount of your contribution limit |
| > $65,000 but < $75,000 | Partial deduction | |
| ≥ $75,000 | No deduction | |
| Married filing jointly (both covered by retirement plans at work) | ≤ $104,000 | Full deduction up to the amount of your contribution limit |
| > $104,000 but < $124,000 | Partial deduction | |
| ≥ $124,000 | No deduction | |
| Married filing jointly (only one spouse covered by retirement plan at work) | ≤ $196,000 | Full deduction up to the amount of your contribution limit |
| > $196,000 but < $206,000 | Full deduction up to the amount of your contribution limit | |
| ≥ $206,000 | Full deduction up to the amount of your contribution limit |
Withdrawal Requirements
You can withdraw money out of your account at any time, but taxes and penalties may apply. You can avoid paying any penalties if you wait until you are at least 59½ years old before making any withdrawals.
You have to start taking money out of your IRA starting at age 72, known as required minimum withdrawals, or RMDs.
These are the basic rules that apply to most people for regular IRAs. Rules are different for Roth IRAs, SIMPLE IRAs, and inherited IRAs so please talk to your financial advisors or let me know if you have any questions.
.Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
