IRA and Roth IRA Income limits

February 21, 2020

It's tax time, and many folks are thinking about making contributions to their IRA or Roth IRAs for 2019 before they file their tax returns.  Traditional IRA and Roth IRAs can be great ways to save for retirement in a tax deferred or tax advantaged manner.  However, many don't know that these preferential tax vehicles were designed with income limits in order to limit those who can participate to folks earning below certain income thresholds. 

Said more succinctly, if you make too much money, you may not be able to realize the tax benefits.

Remember - we're referencing IRAs and Roth IRAs only here.  Income or deductibility limits on your employer retirement plans (401(k), 403(b), Simple IRA, etc.) have completely different sets of parameters.

First - the Traditional IRA (or possibly known as a Rollover IRA).  The general idea of an IRA is to deduct your contributions from your income in the year you make them and then when you make withdrawals in retirement you pay tax on all withdrawals at that time.  This can be a sound strategy if you feel you are in a higher tax bracket now than you will be when you are making withdrawals.

You can ALWAYS contribute to an IRA so long as you have at least as much in earned income as you contribute, the question is, can you deduct it from your income as you file your taxes?

The income limits depend on how you file your taxes and whether or not you and/or your spouse have access to an employer retirement plan, but to illustrate a common example let's say you file married joint tax returns and Spouse A has access to an employee retirement plan and Spouse B does not.

In this case for Spouse A, if your joint Adjusted Gross Income (AGI)* is $103k or less in 2019, you can deduct the full amount of your contribution.  Maximum contributions if you are under 50 years old is $6,000 per person and if 50 or over, that is $7,000 per person.**

If your AGI is over $123k, then you can NOT deduct any of your contribution from your income. 

If the AGI is inbetween $103k & $123k, then you can deduct the corresponding partial amount of your contribution.  So for example if your AGI is $113k you could deduct 50% of your contribution.

For Spouse B, the spouse with no access to a retirement plan at work, the limits are higher.  $193k or less and you can fully deduct the contribution, but if AGI is over $203k, you cannot deduct.  Inbetween you can partially deduct.

Remember you can always make a contribution to an IRA and any potential growth in the account will be tax deferred until you withdrawal, but we always tell folks to be careful doing this.  If you take this approach it is imperative to keep track of what is taxable at withdrawal and what is not, because if you or your advisor or accountant don't stay on top of it you could end up paying taxes on funds twice!  No bueno!

Ok, now for the Roth IRA, and it's simpler.  It follows the same numbers as a "Spouse B" in our example above no matter if you have access to an employer retirement plan.  If joint AGI is less than $193k, you can make a contribution.  Over $203k and you can't.  In between you can make a partial contribution.

That seems easy, but I like to point out to clients that the tax brackets change from 22% to 24% at $168,400 in income.  Because you're paying tax now on Roth contributions, if you're over $168,400 in joint AGI you should ask yourself if you believe you'd be at or above the 24% tax bracket income levels in retirement.  If the answer is no, then perhaps making Roth contributions does not make sense from a tax standpoint.

Hope these tips help and feel free to ask us if you have questions!

*AGI does not directly translate to your salary.  Your standard or itemized deductions will make your AGI lower than your salary total.

**All figures are referenced direct from the website and are based on 2019 rates.  Limits/rates/thresholds are typically adjusted annually.

IRA withdrawals are taxed as ordinary income and may be subject to a 10% federal tax penalty if withdrawn prior to age 59 1/2. Roth IRA contributions are subject to income limitations. Roth IRA earnings withdrawn prior to the end of the Roth IRA five-year aging period and prRior to reaching age 59½ will be subject to a 10% early withdrawal penalty unless used to meet qualified expenses.  A distribution from a Roth IRA is tax-free and penalty-free provided that the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, death, disability, or qualified first-time home purchase.  (02/20)