Maximizing IRA Contributions

Individual retirement accounts provide taxpayers the opportunity to save for their future while potentially providing tax savings today. There are several different types of IRAs, each with its own requirements and features, but all offer important tax benefits that could help you save more for retirement. While these tax-advantaged accounts may seem complicated at first, the basics are much easier to understand than you might think. Here we discuss the two most popular types of IRAs and strategies for saving on current and future tax bills.


The new federal budget bill signed December 20, 2019, included the passage of the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), which made changes to the IRA rules and other areas of tax law. This article discusses the 2020 and 2019 IRA contribution rules as 2019 rules are still in effect for returns prepared this coming tax season. Look for a future article discussing the SECURE Act in greater detail.

Traditional IRA

Tax-advantaged retirement accounts like traditional IRAs allow you to save for retirement and defer paying taxes until the money is withdrawn in the future. Contributions to traditional IRAs are tax-deductible, and thus reduce taxable income in the year of the contribution. The IRA-related deduction may also lower your income enough to qualify for additional tax credits and deductions. This IRA is often considered by those who expect to be in a lower tax bracket in retirement than they are now.

For fiscal 2019, taxpayers can make a tax-deductible contribution to their IRA of up to $6,000; for taxpayers age 50 or older there is an additional $1,000 “catch-up” amount for a total contribution cap of $7,000. In order for a contribution to be tax-deductible, there are some requirements:

  • The taxpayer must have earned income; however, there is an exception for spouses with no earned income who file joint returns.
  • The taxpayer must be under 70 1/2 years old.
  • Contributions must be made by the due date of the tax return — you have until April 15, 2020, for your 2019 return.

For fiscal 2020, the contribution amounts remain the same, but some of the requirements have changed. (The deadline for contributions – the due date of the tax return – remains the same, so April 15, 2021, for a 2020 return.) The new requirements:

  • As with the prior rules, the taxpayer must have earned income; and the exception remains for spouses with no earned income who file joint returns. But taxable stipends and fellowships are now considered earned income for IRA contributions.
  • There is no longer an age limit. This is the most significant change to the IRA rules under the SECURE Act.

While contributions are tax-deductible, distributions from traditional IRAs are taxable at the time of distribution. Traditional IRAs require minimum distributions (also known as RMDs) to begin when the taxpayer reaches 70 1/2 years of age for 2019, changing to 72 years of age starting in 2020. Distributions before the taxpayer reaches 59 1/2 years of age remain prohibited; if a distribution is made before the taxpayer reaches the age of 59 1/2, an early withdrawal penalty of 10% of the amount withdrawn may apply.

Roth IRA

A Roth IRA is another popular retirement account that may be more advantageous for certain taxpayers. While contributions to a traditional IRA are tax-deductible and distributions taxable, a Roth IRA contribution is taxed, and distributions are tax-free. This structure may benefit taxpayers who are currently in lower tax brackets; they pay the tax now and withdraw the money tax-free in retirement when they may be in a higher tax bracket. The same applies to a taxpayer’s heirs; beneficiaries of Roth IRAs do not owe income tax on distributions and can stretch out distributions over several years.

The annual amount a taxpayer can contribute to a Roth IRA in 2019 and 2020 is the same as a traditional IRA. As with traditional IRAs the taxpayer must have earned income in order to make a contribution, with the exception for spouses with no earned income who file joint returns. Contributions for Roth IRAs are also due by the due date of the tax return – so you have until April 15, 2020, for your 2019 return.

In contrast to the 2019 traditional IRA rules, taxpayers can make contributions at any age to a Roth IRA. Also, Roth IRAs do not have required minimum distributions but early withdrawal penalties may still apply for distributions made when the taxpayer is under 59 1/2 years old.

Roth conversions

If the tax reform law lowered your tax bracket or if you believe that your tax rate will increase in the future, you may benefit from converting your traditional IRA to a Roth IRA now while your rate is lower. By doing so, you pay tax on the amount at the time of conversion and have nontaxable distributions in retirement.

Studies show that many Americans are struggling with saving enough for retirement, and many financial experts estimate that you may need up to 85% of your pre-retirement income in retirement. These retirement savings vehicles are some of the strategies that can help create a savings and tax plan that accounts for your long-term financial goals and well-being.

It’s important to keep in mind that IRAs often work best as a connected and integral part of your overall strategy to best meet your financial, retirement and tax planning goals. Talk with a member of our team of tax professionals about how retirement planning can generate tax savings today and provide savings for your future.

* This article is not a complete listing of all the details related to the tax topic and you should contact your CPA for a more detailed discussion regarding these items and how they may apply to your specific situation.