Individual Retirement Accounts: Traditional & Roth

In this series of four, we will look at various tax advantageous retirement and savings vehicles and their maximum contribution amounts for 2020. We hope that you check on your progress towards maxing it out.

Let’s start with the well-known retirement plans that many folks contribute to on their own – self-funded Individual Retirement Accounts: Traditional and Roth. Congress established these “tax breaks” to encourage us to save for our retirement. These are the vehicles you go out and purchase and drive on your own.

REINFORCING THE BASICS!

What is a Traditional IRA? Putting money in IS ALWAYS tax deductible. Taking money out IS ALWAYS taxable as ordinary income and sometimes there is a whopping punishment if you take it out before you are 59 ½ years old. A whopping punishment is an IRS “early withdrawal penalty” and it is 10% of the amount you take out while being too young (premature distribution).

What is a Roth IRA? Putting money in IS NEVER tax deductible. Taking that money out IS NEVER taxable but sometimes there is that whopping punishment if you take it out before you are 59 ½ years old.

HOW LONG HAVE THESE BEEN AROUND?

The Traditional IRA’s first public appearance was way, way back in 1975 and the initial maxing it out contribution was $1,500.

The Roth IRA’s first public appearance was way back in 1997 and the initial maxing it out
contribution was $2,000.

HOW MUCH CAN I CONTRIBUTE IN 2020?

For both Traditional and Roth IRAs, the maxing it out amount is $6,000 and add a $1,000 if you’re over age 50 and want to catch-up. There is no change from 2019.
If you haven’t maxed out by New Year’s Eve 2019 and you intend to contribute before Tax Deadline Day 2020, you have an opportunity to opt for the contribution going into 2019 or 2020.

IS THERE AN INCOME LIMIT FOR CONTRIBUTING TO AN IRA?

Not for Traditional IRAs.

But Roth IRA contributions are limited by Modified Adjusted Gross Income (MAGI). If you are not married yet,) for better or for worse, head of household or married filing separately: you can max it out if MAGI, (not MAGA!), is less than $124,000; contribute some if between $124,000 and $139,000; and, NO contributions at all if MAGI is more than $139,000. For married folks filing jointly and Qualifying Widow/er those amounts are: $196,000 and $206,000.

HOW MUCH OF MY 2020 CONTRIBUTION IS TAX DEDUCTIBLE?

For Traditional IRAs how much of the contribution being deductible is limited by how much you make and if you have a retirement plan through your employer.

If you are single, head of household or married filing separately and have a plan through work: the whole contribution is tax deductible if MAGI is less than $65,000; partly deductible between $65,000 and $75,000; and, not at all tax deductible if you make over $75,000; at which point you should consider contributing to a Roth IRA. For married folks filing jointly and Qualifying Widow/er those amounts are: $104,000 and $124,000.

If your spouse has a plan through work and you don’t, the amounts are a little bit higher: $196,000 and $206,000.

If you are self-funding an IRA on your own then the entire contribution up to maxing it out
is fully deductible.

Roth IRA contributions are never tax deductible and the account grows tax-free as well.

CAN I CONTRIBUTE AFTER I RETIRE?

It used to be no more contributing to your Traditional IRA after you turn 70 ½ even if you still haul yourself off to work instead of sleeping in or doing fun stuff. Starting in 2020, there is no more age cap on contributing to your Traditional IRA.

Contributions to Roth IRAs are not stopped when you turn 72. So, you can max it out.
no matter how old you are.

WHEN CAN I GET MY MONEY?

After age 59 ½: Traditional AND Roth. If you were hoping to hang onto it and leave it untouched for a while, you can. Until you are 72, then if you have Traditional IRAs government makes you start taking your money out annually as a Required Minimum Distribution (RMD). This age limit increased in December 2019. Look for our blog February 10, 2020 where we talk about the SECURE ACT. You can take out more than the RMD but not less. And if you don’t take out the minimum, the punishment can be HUUUGE!, as that RMD amount not withdrawn is taxed at a whopping 50%. Take it out and spend it or not spend it, or put it in a Roth IRA. Take it out even if it means sacrificing more earnings. Just Do It.

Just like being responsible for the accuracy of your tax returns, you are responsible for the accuracy of the RMD. There are folks who will help you though, namely the IRA custodian or plan administrator – The Mechanics.

There is no RMD with a Roth IRA. You are not forced to start withdrawing, not at 72, not at 82, not at 92, not even after you die because there is no RMD for your beneficiary either.

WHAT IF I NEED SOME CASH BEFORE I’M 59 1/2?

Sure, you can withdraw from the Traditional IRA. Remember the withdrawn amount will increase your income and possibly put you in a higher tax bracket AND THEN there is the punishment. There are times when you can take your money out of Traditional IRAs without being punished.

These are times of:

 ⇒ Paying for health insurance premiums when unemployed for at least 12 consecutive weeks;
 ⇒ Paying for medical expenses which total more than 10% of your adjusted gross income;
 ⇒ Paying for college for yourself, your spouse, your kids, and even your grandkids;
 ⇒ Permanent disability as defined by the IRS and backed up by a doctor’s verification;
 ⇒ Inheriting an IRA from your spouse and even folks you aren’t or were never married to;
 ⇒ Buying, building, or rebuilding a house for the first time for yourself, your spouse, both sets of parents and grandparents and all the kids and grandkids;
 ⇒ Serving your Country (Reserve and National Guard) for more than 179 days;
 ⇒ Withdrawing on a specific schedule (SEPP – Substantially Equal Periodic Payments);
 ⇒ And, there’s the time the IRS personally snatches unpaid taxes.

There are two kinds of money in Roth IRAs. 1. Principal – The money you put in/contributions and 2. Earnings – Interest, dividends, capital gains, and the like. Remember withdrawals are tax-free but if the money taken out is earnings, a 10% penalty will be blasted on your tax return.

WHAT OTHER THINGS SHOULD I KNOW ABOUT INDIVIDUAL RETIREMENT ACCOUNTS?

 ⇒ First, that they are individual and not joint. A married couple can’t open one together. And neither can your running club or drinking buddies.
 ⇒ If you are contributing to both a Traditional IRA AND a Roth IRA, the total amount of money you can contribute to both accounts can’t exceed the annual limit or earned income (money you make), whichever is the lesser.
 ⇒ If you do exceed it, with an ineligible contribution, the IRS might punish you with a 6% excessive-contribution penalty.
 You can never borrow and pay back money from any IRA. This is an absolute no-no. A no-no is an IRS “prohibited transaction”.

WRAPPING IT UP.

A Traditional IRA is the retirement vehicle to drive for those who: prefer immediate tax deductions lowering the out of pocket cost for the contribution or believe their tax bracket will be lower in those golden, retirement years.

A Roth IRA is the retirement vehicle to drive for those who: can afford to contribute the full $6,000/$7,000 without lowering the out of pocket cost or believe their tax bracket will be higher in those golden, retirement years.

There are exceptions to most rules and more than one way to cook an egg. So, if you are considering contributing or withdrawing funds, changing your contribution strategy, rolling over or transferring, converting or recharacterizing existing retirement accounts, or have recently inherited an IRA, it is super important to reach out to Carol McAtee and Associates for answers and guidance.  Call Carol First!

info@accpas.com OR 727-327-1999.

Be sure to check back here next week for the second of our four-part series, Employer-provided Plans and check us out on and Facebook and Twitter for whatever it is we’ll be posting.  And remember to max it out.

McAtee and Associates’ Disclaimer:

Our blog is intended for educational and awareness purposes. The general information provided about taxes, accounting, and business-related topics is by no means intended to provide or constitute professional advice. Reading our blog does not create a Client/CPA relationship between you and us. The blog, including all contents posted by the author(s) as well as comments posted by visitors, should not be used as a substitute for professional advice or as a substitute for communicating with a competent, human professional.

Our blog posts are written using current information and current or proposed rules and regulations. Information becomes old and outdated. Rules and regulations are frequently changed, added, amended, and/or left to expire. This is extremely true with most things tax and to a lesser and slower extent, most things accounting. We do not go back and update posted blogs. Always check with your CPA or accountant regarding not only rules and regulations but available options and how it all applies to your fact pattern and you.

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