Do you want to save more for retirement on a tax-favored basis? If so, and if you qualify, you can make a deductible traditional IRA contribution for the 2019 tax year between now and the tax filing deadline and claim the write-off on your last year’s income tax return. Or you can contribute to a Roth IRA and avoid paying taxes on future withdrawals.

You can potentially make a contribution for a deduction on last year’s tax return, with this year’s earning. If you’re married, your spouse can potentially do the same, thereby doubling your tax benefits.

The deadline for a traditional and Roth contributions for most taxpayers is April 15 of the following year.

There are some ground rules. You must have enough earned income last year (from jobs, self-employment or alimony) to equal or exceed your IRA contributions for the tax year. If you’re married, either spouse can provide the necessary earned income. And you can’t make a deductible contribution to a traditional IRA if you were 70½ or older as of December 31 of last year. (But you can make one to a Roth IRA after that age.)

Finally, deductible IRA contributions are phased out (reduced or eliminated) if last year’s modified adjusted gross income (MAGI) is too high.

Types of contributions

If you haven’t already maxed out your IRA contribution limit for last year, consider making one of these three types of contributions by the April deadline:

1. Deductible traditional. With traditional IRAs, account growth is tax-deferred and distributions are subject to income tax. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k), the contribution is fully deductible on your current tax return. If you or your spouse do participate in an employer-sponsored plan, your deduction is subject to the following MAGI phaseout:

  • The phase out limits change each year. Contact our office for upt to date details.

Taxpayers with MAGIs within the applicable range can deduct a partial contribution. But those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

2. Roth. Roth IRA contributions aren’t deductible, but qualified distributions — including growth — are tax-free, if you satisfy certain requirements.

Your ability to contribute, however, is subject to a MAGI-based phaseout:

  • For married taxpayers filing jointly will have an income rang that will be adjusted for inflation each year.
  • For single and head-of-household taxpayers will have a lower income range than married filig joint. It will be adjusted for inflation each year.

You can make a partial contribution if your MAGI is within the applicable range, but no contribution if it exceeds the top of the range.

3. Nondeductible traditional. If your income is too high for you to fully benefit from a deductible traditional or a Roth contribution, you may benefit from a nondeductible contribution to a traditional IRA. The account can still grow tax-deferred, and when you take qualified distributions, you’ll only be taxed on the growth.

Act fast

Traditional and Roth IRAs provide a powerful way to save for retirement on a tax-advantaged basis. Contact us to learn more about making prior year contributions and making the most of IRAs in this year and beyond.

© 2020 Ben R Shull CPA LLC

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