Individual Retirement Accounts (IRAs)

IRAs remain an attractive option for retirement savings. Traditional IRA contributions may be tax deductible, depending on your income and participation in an employer-sponsored retirement plan. Contributions and earnings accumulate on a tax-deferred basis. However, income taxes are due when distributions are taken.

2021 Retirement Contribution Limits

Is My IRA Contribution Deductible?

The contribution limit is $6,000 in 2021 (and will be adjusted for inflation in subsequent years). If you are age 50 or older, you can contribute an additional $1,000. The total of your contributions to one or more IRAs may not exceed these limits. Deductions phase out for active participants in an employer-sponsored plan as follows: for single filers with AGIs between $66,000 and $76,000, and for joint filers with AGIs between $105,000 and $125,000. Due to changes from the SECURE Act, for tax years beginning in 2020, working individuals are now allowed, regardless of their age, to contribute to a traditional IRA. The age cutoff used to be 70½.

A “nonparticipant” spouse may make a deductible IRA contribution, as long as the couple’s AGI is less than $208,000. Couples with a nonworking spouse can make a combined contribution of up to $12,000 (plus catch-up, if applicable).

Required minimum distributions (RMDs) are required once the owner of a traditional IRA reaches age 72. The first RMD can be delayed until April 1 of the year after turning 72 (a change since the passing of The SECURE Act). For each year thereafter, the deadline is December 31. The RMD amount is determined by 1) the previous-year year-end IRA balances and 2) a life-expectancy schedule provided by the IRS. With the passing of The SECURE Act in December 2019, fewer beneficiaries will be able to extend distributions from the inherited IRA over their lifetime. Many will instead need to withdraw all assets from the inherited IRA within 10 years following the death of the original account holder. Exceptions to the 10-year distribution requirement include assets left to a surviving spouse, a minor child, a disabled or chronically ill individual, and beneficiaries who are less than 10 years younger than the decedent. It is important to recognize that anyone who has inherited an IRA from an original IRA account holder prior to January 1, 2020 may continue to receive the same RMD’s based on their current distribution schedule. Tax will be due on withdrawal of the deductible contributions and earnings.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) temporarily provides for special distribution options and rollover rules for certain retirement plans and IRAs. This includes expanded distribution options and favorable tax treatment for up to $100,000 of COVID-related distributions from eligible retirement plans (such as section 401(k) plans and IRAs) to qualified individuals, as well as special rollover rules for those distributions.

Roth IRAs

Roth IRAs, with their tax-free distributions, continue to be popular savings vehicles. Contributions to Roth IRAs are not deductible, and are subject to income limitations. As with traditional IRAs, you may contribute up to $6,000 to a Roth IRA in 2021 ($7,000 if you are 50 or older). Again, combined contributions to one or more IRAs may not exceed these limits.

If you withdraw any of the amount rolled over or converted into a Roth IRA within five years of the rollover, you may be charged a 10% early withdrawal tax.

The greatest benefits of Roth IRAs may be in transferring wealth to heirs. A Roth IRA is not subject to RMDs during the owner’s lifetime, contributions are allowable at any age, and may provide far more to a beneficiary than other plans. Assets in the account for five tax years can pass to heirs without current income tax. Non-spousal beneficiaries of a Roth IRA have to take minimum distributions (which are tax-free) but can stretch them out over a lifetime. In the meantime, the Roth continues to enjoy tax-free growth.

A Roth can grow into a large sum for a child who has earned income. The parent can fund the account but the contribution amount cannot exceed the child’s earned income.