As 2020 draws to a close, we have a few year-end reminders for those who already have an Individual Retirement Account (IRA) or plan to open one soon.
Be aware of the contribution and deduction limits
This year you can contribute up to $6,000 ($7,000 if you’re 50 or older) to a traditional or Roth IRA. As long as you file a joint tax return, you and your spouse can each contribute to an IRA even if only one spouse has earned income. If you haven’t already reached your contribution limit, you have until April 15, 2021 to make contributions for 2020.
When you contribute to a traditional IRA, your contributions are deductible on your tax return. If you’re covered by a retirement plan at work, the phase-out ranges for 2020 are:
• Single or head of household – $65,000 to $75,000.
• Married filing jointly or qualifying widow(er) – $104,000 but less than $124,000.
• Married filing separately – $0 – $10,000.
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Avoid making excess contributions
If your contributions exceed the IRA limits for 2020, you will have to pay a six percent tax on the excess amount. This is not a one-time penalty, you will continue to pay taxes on the excess amount as long as the money remains in your account. In order to avoid the taxes, the excess must be withdrawn by the tax deadline.
No need to take your required minimal distribution this year
Normally, individuals who are at least 70 ½ years old must take a required minimum distribution from their traditional IRA by December 31st. However, the CARES Act has waived the requirement for 2020. So, you don’t have to take any money out of your IRA this year.
IRA distributions may impact your premium tax credit
If you plan to take an IRA distribution at the end of the year and expect to claim the premium tax credit, choose your distribution amount carefully. Taxable distributions increase your income which may make you ineligible for the premium tax credit. If your distribution boosts your household income over the 400% federal poverty line for your family size, you’ll have to repay all of the advance credit payments made on your behalf.