How to Avoid Mistakes in Individual Retirement Account Deductions
If you’re looking to reduce your tax bill as the year comes to a close, contributing to an individual retirement account (IRA) would be a good idea. There are, however, several laws and limitations that to be aware of before moving assets.
“Anyone — you, me, Jeff Bezos — may contribute to a typical IRA,” says Howard Pressman, a certified financial advisor and partner in Vienna, Virginia. The ability to deduct IRA contributions, on the other hand, is contingent on two factors: participation in a workplace retirement plan and your income.
For 2021, anyone can contribute up to $6,000 to their IRA (or $7,000 if they are 50 or older) at any point before the tax-filing deadline.
If both spouses aren’t participating in an employer’s retirement plan, an investor and their spouse may be “in the clear” to write off their entire individual retirement account contributions, according to Larry Harris, CFP and director of tax services at Parsec Financial in Asheville, North Carolina.
However, if either spouse has coverage and participates in a plan, including contributions from the employee or company, the regulations change. Participation in this instance includes employee contributions, employer matches, profit sharing, and other employer deposits.
Limits On Individual Retirement Account Deductions And Phase Outs
If your modified adjusted gross income is less than $66,000, you can get a tax credit on your entire IRA contribution if you use a workplace retirement plan.
You can also take a partial deduction before you hit $76,000, but once you do, the benefit vanishes.
Married couples filing jointly may obtain the whole advantage if their combined income is less than $105,000. They’ll get partial tax relief if their combined income is less than $125,000.
An IRS chart detailing each of these limits can be found here.
Spouses who don’t work outside the home can contribute to a spousal IRA based on the earning spouse’s income.
What Are Your Options If You Can’t Deduct?
While some investors will not be eligible for individual retirement account deductions, there are other choices to consider.
Non-deductible IRA contributions are popular because some investors may be able to convert the after-tax deposit to a Roth IRA, evading the income limits, via a “backdoor” approach.
The strategy, on the other hand, may be on the way out.
According to the summary released by the House Ways and Means Committee, House Democrats want to crack down on the strategy after December 31, regardless of income level.
However, with the budget in flux, it’s unclear whether the provision will make it through.
Here’s the breakdown so far:
- Some investors may be eligible for a federal write-off for their traditional IRA contributions up to a certain limit.
- However, the tax break is contingent on income and participation in an employer retirement plan, such as a 401(k) or pension.
- Those who are unable to deduct IRA contributions may have other options, according to financial experts.
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Bio:
For over 30-years Flavio “Joe” Carreno of The Retirement Advantage has been a Federal Employee Retirement System specialist (FERS) as well as a Florida Retirement System specialist (FRS) independent advocate. An affiliate of PSRE (Public Sector Retirement Educators), a Federal Contractor & Registered Vendor to the Federal Government, also an affiliate of TSP Withdrawal Consultants. We will help you understand your FERS & FRS Benefits, TSP & Florida D.R.O.P. withdrawal options in detail while recognizing & maximizing all concurrent alternatives available.Our primary goal is to guide you into retirement with no regrets; safe, predictable, stable, for life. We look forward to visiting with you.
Disclosure:
Not affiliated with the U.S. Federal Government, the State of Florida, or any government agency. The firm is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Although we make great efforts to ensure the accuracy of the information contained herein we cannot guarantee all information is correct. Any comments regarding guarantees, safe and secure investments & guaranteed income streams or similar refer only to fixed insurance and annuity products. Fixed insurance and annuity product guarantees are subject to the claimsâ€paying ability of the issuing company. Annuities are long-term products of the insurance industry designed for retirement income. They contain some limitations, including possible withdrawal charges and a market value adjustment that could affect contract values. Annuities are not FDIC insured.
