This time of year, clients often ask questions about contributing to their individual retirement accounts (IRAs) since the deadline is coming soon.
IRA Contributions Deadline
The deadline to contribute to traditional IRAs, Roth IRAs, and SEP IRAs for 2021 is April 18, 2022. No, that’s not a typo, the IRS gave us all a few extra days this year, as the deadline is usually April 15th, but the 15th is a holiday this year—Emancipation Day, a holiday in Washington, D.C., is on April 15th, so Tax Day is postponed to the next business day, April 18th.
IRA Income and Contributions Limits
There are income limitations for contributing to IRAs (see below). The amount you can contribute is limited by your modified adjusted gross income (MAGI). If you exceed the income limits, the IRS does not allow pre-tax contributions to your IRA. You can, however, make after-tax contributions, but few do.
For the 2021 tax year, the income limits for IRA contributions are as follows:
Traditional IRA Income Limits
Filing Status – Single
- MAGI must be under $76,000 for 2021 for taxpayers covered by a workplace retirement plan, such as a 410(k).
Filing Status – Married Filing Jointly
- MAGI must be under $125,000 for 2021 for taxpayers covered by a workplace retirement plan.
Note: If you are not covered by a workplace retirement plan, there is no income limit. In other words, you can contribute up to the maximum IRA contribution limit (see below).
Traditional IRA Contribution Limits
- 100% of your income up to $6,000 if under age 50.
- 100% of your income up to $7,000 if age 50 or over.
Note: The contribution limit is based on the age you are at year end (December 31). For example, if you turn 50 years old on December 28, you may contribute the larger amount.
Roth IRA Income Limits
Filing Status – Single:
- MAGI must be under $140,000 for 2021.
Filing Status – Married Filing Jointly:
- MAGI must be under $208,000 for 2021.
Roth IRA Contribution Limits
- 100% of your income up to $6,000 if under age 50.
- 100% of your income up to $7,000 if age 50 or older.
SEP IRA Income Limits:
A Simplified Employee Pension IRA (SEP IRA) is a traditional IRA for self-employed people and small business owners with few or no employees. Many of my self-employed clients have SEP IRAs because they can contribute far more than to a traditional or Roth IRA.
- There is no income limit on a SEP IRA, but there is a maximum contribution limit.
SEP IRA Contribution Limits:
- Contributions made to an employee’s SEP IRA cannot exceed the lesser of 25% of compensation, or $58,000, for 2021.
- If you are self-employed, you can contribute 25% of your net earnings from self-employment (not including contributions for yourself), up to $58,000, for 2021.
While there is still time to contribute to your IRA, some other retirement account deadlines have passed:
- Roth IRA conversion deadline was December 31, 2021.
- 401(k) contribution deadline was December 31, 2021.
Opening an IRA for a Child
Many clients ask if they may contribute to their child’s Roth IRA. The answer is yes, as long as the child has their own earned income. If your child earns less than the IRA contribution limit, your contribution to their IRA is capped at the child’s total income for the year. For example, if your child made $3,000 in 2021, they (or you) may contribute up to $3,000 (100% of earned income, up to $6,000) to their Roth IRA. If a child made $10,000, they (or you) may contribute up to $6,000 (the maximum that can be contributed) to their IRA. Also, a minor may open a Roth IRA (I did this for my own daughter and contributed on her behalf when she had earned income).
Note: Clients also ask if they may contribute to their non-working spouse’s IRA. The answer is yes—if the working spouse meets the income limits and files a joint federal income tax return.
We all know that steady, disciplined saving and investing is what can allow one to retire comfortably. So be sure to get those IRA contributions in by the deadline, and if you have not completed a retirement plan, just let us know—retirement plans are complimentary for Capital Advantage clients!
Sources:
- www.irs.gov/retirment-plans
- www.nerdwallet.com/article/investing/what-is-a-sep-ira
