Funding Your IRA for 2020

Saving for retirement is necessary and funding your IRA is the way to do it. Here are the basics that you’ll need to know when funding your IRA for 2020.

2020 Contribution Limits

For 2020, the most you can contribute to your Roth and traditional IRAs is a total of $6,000 if you're younger than age 50 and $7,000 if you are 50 or older. [1]

Remember: You can only contribute "earned income"

What is earned income? According to the Internal Revenue Service (IRS), earned income includes wages, salaries, bonuses, commissions, tips, and net earnings from self-employment. It can also include long-term disability, union strike benefits and, potentially, payments from certain deferred retirement compensation arrangements.

Earned income does not include:

• Child support
• Alimony
• Income from a rental property
• Interest and dividends from investments
• Pay you received while an inmate in a penal institution
• Retirement income
• Social Security
• Unemployment benefits

2020 Roth IRA Income Limits

For your Roth IRA, you will need to understand the amount of contributions that you can make in 2020. This chart from the IRS breaks down how much you can contribute dependent on your income. [2]

2020 Traditional IRA Deduction Limits

If you're covered by a retirement plan at work, use this table from the IRS to determine if your modified AGI affects the amount of your deduction. Note that if you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the "single" filing status.

Modified Adjusted Gross Income (MAGI)

Another term you’ll need to know when funding your IRA is modified adjusted gross income or MAGI. What is MAGI? MAGI is your household’s adjusted gross income with any tax-exempt interest income and certain deductions added back. The IRS uses MAGI to determine if you qualify for certain tax benefits.

MAGI determines:

• If you can contribute to a Roth IRA
• If you can deduct your traditional IRA contributions if you or your spouse has a retirement plan at work
• Your eligibility for the premium tax credit which lowers health insurance premiums

Excess IRA Contributions

You should max out on your IRA contributions, but make sure not to contribute too much. If you go overboard, the IRS considers it an ineligible or excess contribution. Contributing too much can mean that you'll owe a six percent penalty on the excess contribution each year (until you fix your mistake). Pay attention to the IRS's contribution limits for the year. Always make sure to keep track of your contributions and watch your income, in case it changes from year to year.

What is the Saver’s Tax Credit?

The saver's tax credit is a non-refundable tax credit that can be claimed by taxpayers who make salary-deferral contributions to their employer-sponsored 401(k), 403(b), SIMPLE, SEP, or governmental 457 plan and/or make contributions to their traditional or Roth IRA. The amount of the credit varies and depends on the adjusted gross income (AGI) of the taxpayer and the amount of the contribution(s). [3]

The Bottom Line

You need to save for retirement and any type of IRA is an excellent way to do so. Be sure to follow the rules for contribution, income, and deduction limits in order to take full advantage of these accounts and avoid any penalties.

Want more information about funding your IRA? We are always here to help! Contact us to learn more.

Sources:

[1]. IRA Contribution Limits in 2020, Investopedia

[2]. Amount of Roth IRA Contributions That You Can Make for 2020, IRS

[3]. Saver’s Tax Credit, Investopedia