#retirementplanning

There’s Still Time to Contribute to an IRA for 2020

Even though tax filing season is well underway, there’s still time to make a regular IRA contribution for 2020. You have until your tax return due date (not including extensions) to contribute up to $6,000 for 2020 ($7,000 if you were age 50 or older on or before December 31, 2020). The Internal Revenue Service (IRS) delayed the April 15th tax-filing deadline to May 17th, giving taxpayers an additional month to contribute for 2020. This postponement applies to individual taxpayers, including individuals who pay self-employment tax. This relief does not apply to estimated tax payments that are due on April 15, 2021.

The extension will also provide taxpayers additional time to contribute to an Individual Retirement Account (IRA). You can contribute to a traditional IRA, a Roth IRA, or both, as long as your total contributions don’t exceed the annual limit (or, if less, 100% of your earned income). You may also be able to contribute to an IRA for your spouse for 2020, even if your spouse didn’t have any 2020 income.

Traditional IRA

You can contribute to a traditional IRA for 2020 if you had taxable compensation. However, if you or your spouse were covered by an employer-sponsored retirement plan in 2020, then your ability to deduct your contributions may be limited or eliminated, depending on your filing status and modified adjusted gross income (MAGI). (See table below.) Even if you can’t make a deductible contribution to a traditional IRA, you can always make a nondeductible (after-tax) contribution, regardless of your income level. However, if you’re eligible to contribute to a Roth IRA, in most cases you’ll be better off making nondeductible contributions to a Roth, rather than making them to a traditional IRA.

IF YOU ARE COVERED BY AN EMPLOYER SPONSORED PLAN:

2020 income phaseout ranges for determining deductibility of traditional IRA contributions:
1. Covered by an employer-sponsored plan and filing as:Your IRA deduction is reduced if your MAGI is:Your IRA deduction is eliminated if your MAGI is:
Single/Head of household$65,000 to $75,000$75,000 or more
Married filing jointly$104,000 to $124,000$124,000 or more
Married filing separately$0 to $10,000$10,000 or more

IF YOU ARE NOT COVERED BY AN EMPLOYER SPONSORED PLAN BUT A SPOUSE IS & FILE JOINTLY

2020 income phaseout ranges for determining deductibility of traditional IRA contributions:
2. Not covered by an employer-sponsored retirement plan, but filing a joint return with a spouse who is covered by a planYour IRA deduction is reduced if your MAGI is:Your IRA deduction is eliminated if your MAGI is:
All Filing Status (i.e., Single or Married)$196,000 to $206,000$206,000 or more

IF YOU ARE NOT COVERED BY EMPLOYER SPONSORED PLAN & FILE SINGLE THERE ARE NO INCOME LIMITS

Roth IRA

You can contribute to a Roth IRA if your MAGI is within certain limits. For 2020, if you file your federal tax return as single or head of household, you can make a full Roth contribution if your income is less than $124,000. Your maximum contribution is phased out if your income is between $124,000 and $139,000, and you can’t contribute at all if your income is $139,000 or more. Similarly, if you’re married and file a joint federal tax return, you can make a full Roth contribution if your income is less than $196,000. Your contribution is phased out if your income is between $196,000 and $206,000, and you can’t contribute at all if your income is $206,000 or more. If you’re married filing separately, your contribution phases out with any income over $0, and you can’t contribute at all if your income is $10,000 or more.

2020 income phaseout ranges for determining eligibility to contribute to a Roth IRA:
Your ability to contribute to a Roth IRA is reduced if your MAGI is:Your ability to contribute to a Roth IRA is eliminated if your MAGI is:
Single/Head of household$124,000 to $139,000$139,000 or more
Married filing jointly$196,000 to $206,000$206,000 or more
Married filing separately$0 to $10,000$10,000 or more

Even if you can’t make an annual contribution to a Roth IRA because of the income limits, there’s an easy workaround. You can make a nondeductible contribution to a traditional IRA and then immediately convert that traditional IRA to a Roth IRA. Keep in mind, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own — other than IRAs you’ve inherited — when you calculate the taxable portion of your conversion. This is sometimes called a “back-door” Roth IRA – check out our prior blog post on Mega Back Door Roth Conversions.

If you make a contribution — no matter how small — to a Roth IRA for 2020 by your tax return due date and it is your first Roth IRA contribution, your five-year holding period for taking qualified tax-free distributions from all your Roth IRAs (other than inherited accounts) will start on January 1, 2020.

Learn more about Roth in Retirement Plans by watching this short video by clicking here.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2021. Edited by BFSG.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

Simplifying Your Retirement Plan

Like all things in life, retirement planning has many aspects to it and a few items we can control but most items are beyond our control. To help remove some of the stress of retirement planning, we would like to help reframe the way that you look at retirement planning. Looking at the chart below it breaks down the most important factors that impact your retirement and are broken into three buckets: 1) things you can control; 2) things you have some control over; and 3) items that you have no control over.

Too often we focus on the things in life that we cannot control and those are the items that cause us the greatest stress. Instead of wasting our time and energy on those items, we instead should put our focus on the buckets that we have control over.

Total Control Bucket

This bucket is the most important because these are the items that you explicitly control.  For most individuals, savings and spending are the two biggest factors for retirement planning and the two items you have the greatest control over! When you work with a Financial Adviser, any recommendations they make typically will try to reduce expenses or make you more money.

Some Control Bucket

This bucket includes things that you can influence but do not have total control over. Items in this bucket would be things like your health and longevity. We can do the best we can to be healthy which will reduce stress and increase life expectancy, but we have no control over diseases like cancer (i.e., heredity traits). Many times, people plan on working till a certain age, but things can change if you experience a layoff or health problems that force you into retirement. It is important to have plans for this bucket like trying to stay healthy, reducing stress, and having a plan for your career. However, we must keep in mind we do not have total control, so having proper hedges in a place like a disability policy, health insurance, emergency fund, etc. should be considered.

No Control

Humans always want to have the illusion of control. Most people do not respond well in dealing with things that they have no control over. The fear of something happening in the no control bucket (i.e. bad market returns) leads to more anxiety and sleepless nights than any other bucket. Remember that worrying is like a rocking chair, it gives you something to do but accomplishes nothing. That is not to say we do nothing with this bucket, but rather you build a retirement plan to reduce risks from this bucket. Market returns are something we have no control over but studies have shown a diversified portfolio produces the best risk-adjusted returns. No one controls what happens with taxes and government policy, but you update your retirement plan once these changes occur.

Summary

Use the above chart as a reminder to focus your time and efforts in retirement planning on the items that you have the most control over. Starting there will produce the best results and will reduce stress since it takes your attention from the items in the no control bucket that cause the most anxiety. Working with a Certified Financial Planner™ and focusing on the two buckets that you can influence, will give you a simple and lower stress approach to retirement planning.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

2021 Retirement Plan Contribution Limits

The IRS announced cost of living adjustments that will impact the 2021 tax year. Contribution limits for pension plans and other retirement related items are affected. We encourage you to review the updated figures by clicking here.