IRA Taxes in 2020: What You Need to Know

Retirement savings seems complicated, but it doesn't have to be. Here's a simple fact: If you earn money from work, then you can open an IRA.

IRAs are useful investment vehicles to help you save for retirement, and unlike 401(k) plans, you don't have to rely on an employer to offer them. By keeping five things about IRAs in mind, you'll be able to make the most of these accounts and save money on your taxes both now and in the future.

1. Maximum IRA contributions are the same in 2020 as 2019

There was no change in the IRA contribution limit for 2020 compared to last year's limits. Those who haven't yet reached age 50 can contribute a maximum of $6,000 for 2020. If you're 50 or older, then you get to claim a $1,000 catch-up contribution, for a total of $7,000.

Image source: Getty Images.

In most cases, though, you can't contribute more than you actually earned from work, including both regular employment and any side jobs you do. If you're married, then you're allowed to make IRA contributions based on your spouse's earnings even if you didn't work or had insufficient earnings to get you to the limit.

2. Traditional and Roth IRAs get taxed differently

There are two kinds of IRAs. Traditional IRAs are available to everyone, and they allow most people to take a tax deduction for the amount they contribute. That's particularly valuable for those in high tax brackets right now, but the downside is that when you take traditional IRA withdrawals later on, you'll pay income tax on all or most of the amount you take out of your account.

For Roth IRAs, the rules differ. Not everyone can contribute to a Roth IRA, and even if you can, you're not allowed to deduct your contributions on your current tax return. Instead, you can take Roth IRA withdrawals with no tax consequences if you've reached a typical retirement age and meet some basic conditions.

3. You might not be able to contribute to a Roth IRA

Roth IRA contributions are subject to income limits. Above certain thresholds, you won't be allowed to contribute to a Roth at all, and those making slightly less might be allowed to make only partial contributions. Below, you can see the income levels that apply for Roth IRA contributions for the 2019 and 2020 tax years.

Data source: IRS. Note: Those who were married, filed separately, and did not live with their spouse during the year can use the single income limits.

4. You might not be able to deduct your traditional IRA contribution

Even though there are no income limits that apply to traditional IRA contributions, you might not be able to deduct your entire contributed amount. Those who have access to a workplace-sponsored retirement plan, or who are married and have a spouse who has such access, can have their deductions cut back or disappear in full. Below are the income limits for those who have workplace retirement plans as part of their own jobs.

Data source: IRS. Note: Those who were married, filed separately, and did not live with their spouse during the year can use the single income limits.

If it's your spouse who has employer plan coverage, then you can deduct the full amount if your income is less than $193,000 in 2019 or $196,000 in 2020. Phase-outs occur between $193,000 and $203,000 in 2017 and between $196,000 and $206,000 in 2018.

5. You still have time to make an IRA contribution for the 2019 tax year

One of the biggest benefits of IRAs is that you can make contributions up to the tax filing deadline. That gives you extra time, until April 15, to make 2019 contributions. Since 2020 has already started, you can also make 2020 contributions at any time this year.

Start saving today

IRAs are excellent vehicles for saving for retirement. If you want to set more money aside and potentially get a nice tax break in the process, just be sure to take action soon -- before it's too late to do contributions for the 2019 tax year.