For those looking to save for retirement, individual retirement accounts remain a great way to take advantage of some favorable tax provisions. IRAs don't require you to pay any taxes on income on gains until you start taking money out of the account. For many people, an upfront deduction lets you save on taxes when you're in a relatively high tax bracket and then pay lower tax rates when your income is lower in retirement.
Every year, the IRS determines how much money savers will be allowed to contribute to traditional IRAs, and it also looks at income limitations on whether you'll be able to deduct those contributions. Although the IRS hasn't yet announced final numbers, it's almost certain that the current limitations on traditional IRA contributions in 2019 will remain unchanged. However, there'll be some minor changes to the income thresholds above which you'll start losing your upfront IRA tax deduction.
What are the 2020 contribution limits?
In 2020, IRA contribution limits should remain where they were in 2019. Those who are younger than 50 as of the last day of 2020 will be limited to $6,000 in contributions. If you're 50 or older by the end of 2020, however, you can do a special catch-up contribution, lifting your total contribution limit to $7,000.
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The first chance to make 2020 IRA contributions is Jan. 1, 2020. But you need to be careful if you contribute then but haven't yet made contributions for 2019.
Because you have until your mid-April tax deadline to make IRA contributions for the previous year, if you start saving in early 2020, you'll have the choice of allocating your contributed amounts to the 2019 or 2020 tax years. If you've already contributed the maximum for 2019, early 2020 IRA contributions will have to go toward the 2020 tax year, but if you haven't yet made full contributions, you'll need to consider which tax year you want your savings to go toward.
The impact of income thresholds
Unlike with Roth IRAs, anyone with earned income from a job or self-employment can contribute to a traditional IRA regardless of how high their income is. Most people are also allowed to deduct those contributions on their current-year tax return.
However, there are some limits that apply if you or a spouse is covered by a workplace retirement plan like a 401(k). Those limits differ depending on whether you or your spouse has eligible coverage at work.
If you're the one who's covered by a plan at work, the following limits will likely apply for 2020:
|
For this filing status: |
Deductions are reduced if income is above this amount |
Deductions are not available if income exceeds this amount |
|---|---|---|
|
Single, head of household, or married filing separately IF you didn't live with your spouse during the year |
$65,000 |
$75,000 |
|
Married filing jointly or qualifying widow or widower |
$104,000 |
$124,000 |
|
Married filing separately IF you lived with your spouse at any point during the year |
$0 |
$10,000 |
Data source: IRS; author calculations.
The numbers in the first two rows of the table above reflect a $1,000 rise from the numbers that applied to the 2019 tax year. That's because those numbers are indexed to inflationary price increases.
If your spouse is the one who has coverage under an employer plan but you don't have coverage, then these higher limits are the ones to follow:
|
For this filing status: |
Deductions are reduced if income is above this amount |
Deductions are not available if income exceeds this amount |
|---|---|---|
|
Married filing jointly |
$196,000 |
$206,000 |
|
Married filing separately IF you lived with your spouse at any point during the year |
$0 |
$10,000 |
Data source: IRS; author calculations.
The joint filing numbers above are $3,000 higher than the corresponding limits for 2019.
How the reductions work
What these limits do is help provide calculations for how much you can deduct from your contribution. In general, the closer you are to the upper limit, the less you can deduct. For example, say that you're single and under 50 years old and have income of $70,000 in 2020. That $70,000 is halfway between the $65,000 and $75,000 thresholds, so you'll only be able to deduct half of the $6,000 contribution limit, or $3,000. If your income was $66,000, on the other hand, you'd only be a tenth of the way through the range, so you'd be able to deduct up to 90% of the $6,000 limit, or $5,400.
Just because a traditional IRA contribution isn't deductible doesn't mean you can't make it. Unlike with Roth IRAs, where income limits apply to whether you can make a contribution at all, any traditional IRA contribution above the deductible limit is simply treated as a nondeductible contribution. Essentially, you get credit for having paid taxes on that amount when you take withdrawals in retirement, making up for the loss of the upfront deduction.
You won't be able to make a 2020 traditional IRA contribution until after the end of 2019. But knowing what's coming will help you plan for the future, making sure you can take full advantage of the tax benefits of traditional IRAs.
