Retirement savings will be able to defer paying income tax on up to $6,000 in an individual retirement account in 2020. Workers with slightly higher incomes will also be eligible to save for retirement in traditional and Roth IRAs and qualify for the saver's tax credit.
Here are the IRA limits for 2020:
- The IRA contribution limit is $6,000
- The IRA catch-up contribution limit will remain $1,000 for those age 50 and older
- 401(k) participants with incomes below $75,000 ($124,000 for couples) are additionally eligible to make traditional IRA contributions
- The Roth IRA income limit is $139,000 for individuals and $206,000 for couples
- The saver's credit income limit is $32,500 for individuals and $65,000 for couples
Consider these new IRA rules when making retirement savings decisions for 2020.
The 2020 IRA contribution limit
The maximum IRA contribution for 2020 is $6,000, the same as in 2019. Retirement savers age 49 and younger can max out an IRA in 2020 by saving $500 per month or making a deposit at any time before the 2020 IRA contribution deadline of April 15, 2021.
The IRA catch-up contribution limit for 2020
Workers age 50 and older can make an extra $1,000 catch-up contribution to an IRA in 2020, for a maximum possible IRA contribution of $7,000 in 2020. The IRA catch-up contribution limit isn’t subject to an automatic annual cost-of-living adjustment.
Traditional IRA income limits for 2020
Workers who don't have a 401(k) plan or similar type of retirement account through their job can contribute to a tax-deductible IRA regardless of how much they earn. However, employees who are eligible for a 401(k) plan may be prohibited from additionally claiming a tax deduction on an IRA contribution if they earn too much.
While you can always make a non-deductible IRA contribution, for which you receive no write-off on your current-year income tax return but get the benefit of tax-deferred growth on the earnings, you need to meet a few criteria to make a deductible IRA contribution. The major considerations are whether you’re single or married, are a participant in a retirement plan like a 401(k) or a 403(b), and how much income you earn for the year.
Participants in 401(k) plans are prohibited from claiming a tax deduction for a 2020 IRA contribution if they earn more than $75,000 as an individual and $124,000 as a married couple filing jointly, up from $74,000 and $123,000, respectively, in 2019. The tax deduction is phased out for individuals earning more than $65,000 and couples earning more than $104,000 in 2020. If only one member of a married couple is eligible for a 401(k) plan at work, the IRA tax deduction is phased out if the couple's income is between $196,000 and $206,000 in 2020, up $3,000 from 2019.
Traditional IRAs allow you to defer paying income tax on your retirement savings until you withdraw the money in retirement.
If your tax rate is going to be lower in retirement than it is now, which may be likely if you’re no longer earning an income at that point, then you should wait to pay the taxes. That means using a traditional IRA and taking the tax deduction now, then paying the taxes at a lower rate when you withdraw the money.
Roth IRA income limits for 2020
After-tax Roth IRA contributions qualify you for tax-free investment growth and tax-free withdrawals in retirement.
A Roth tends to be better for those who have a long time to invest and for those who are in a lower tax bracket. The more time you have to let money grow in a Roth IRA, the bigger the long-term benefit of the tax-free growth on your investments.
Workers can earn $2,000 more in 2020 ($3,000 for couples) and remain eligible to contribute to a Roth IRA. The ability to make Roth IRA contributions is phased out for workers who earn more than $124,000 as an individual and $196,000 as a married couple in 2020.
The limits for a Roth IRA contribution are the same whether you or your spouse participate in a retirement plan.
Those who earn more than $139,000 as an individual or $206,000 as a married couple aren't able to directly contribute to a Roth IRA in 2020. For those who make too much to contribute to a Roth IRA directly, they can make a non-deductible contribution to an IRA and then do a Roth conversion.
The saver's credit income limits for 2020
Workers can earn between $500 and $1,000 more in 2020 and still qualify for the saver's tax credit. The income limit for the saver's credit is $32,500 for individuals, $48,750 for heads of household and $65,000 for married couples in 2020.
The saver's credit can be claimed on traditional and Roth IRA contributions of up to $2,000 for individuals and $4,000 for couples and is worth between 10 and 50% of the amount contributed. Savers with the lowest incomes get the biggest saver's credits. The saver's credit can be claimed in addition to the tax deduction for a traditional IRA contribution.
Source: US News