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Rules for Setting Up That IRA Account

  • January 27, 2021

We currently may not been able to go to a local restaurant for that cold beer or pound the weights at the gym but one thing that you can still do is make an IRA contribution!  As January has quickly passed during these stay at home Covid days, it’s not too late to reduce your 2020 tax bill and sock some money away into an IRA.  The icing on the cake as well is that there are MANY choices out there to invest for the future with sustainability or “ESG” in mind (ESG stands for environment, social and governance) whether its through a full service wealth management firm OR including our own easy to set up Sustainfolio platform. And who doesn’t want to both make money and save the planet.

The deadline to make an individual retirement account contribution that will decrease your 2020 tax bill or even boost your refund is April 15, 2021. (note: this is not tax advice!).

Keep in mind ROTH IRA and Traditional or “contributory” IRAs do have various caveats to them.

  • Roth IRA contribution limits: The amount you can contribute is reduced — and eventually eliminated — at higher incomes.
  • Traditional IRA deduction limits: You can always contribute the full amount, but your ability to deduct contributions may be reduced or eliminated if you or your spouse has a 401(k) or other retirement plan at work and contributions were made for the plan year (this includes employer contributions). No matter what your income, your deduction is allowed in full if neither you or your spouse are covered by a retirement plan at work.

Here’s the full breakdown of those income limits in 2020 and 2021 for traditional IRAs and Roth IRAs, which are based on your modified adjusted gross income.

Traditional IRA income limits in 2020 and 2021

Note: Traditional IRA income limits apply only if you (or your spouse) have a retirement account at work.

Filing status 2020 MAGI 2021 MAGI Deduction
Single or head of household (and covered by retirement plan at work) $65,000 or less $66,000 or less Full deduction
More than $65,000 but less than $75,000 More than $66,000 but less than $76,000 Partial deduction
$75,000 or more $76,000 or more No deduction
Married filing jointly (and covered by retirement plan at work) $104,000 or less $105,000 or less Full deduction
More than $104,000 but less than $124,000 More than $105,000 but less than $125,000 Partial deduction
$124,000 or more $125,000 or more No deduction
Married filing jointly (spouse covered by retirement plan at work) $196,000 or less $198,000 or less Full deduction
More than $196,000 but less than $206,000 More than $198,000 but less than $208,000 Partial deduction
$206,000 or more $208,000 or more No deduction
Married filing separately (you or spouse covered by retirement plan at work) Less than $10,000 Less than $10,000 Partial deduction
$10,000 or more $10,000 or more No deduction

Roth IRA income limits in 2020 and 2021

Filing status 2020 MAGI 2021 MAGI Maximum annual contribution
Single, head of household or married filing separately (if you didn’t live with spouse during year) Less than $124,000 Less than $125,000 $6,000 ($7,000 if 50 or older)
$124,000 up to $139,000 $125,000 up to $140,000 Contribution is reduced
$139,000 or more $140,000 or more No contribution allowed
Married filing jointly or qualifying widow(er) Less than $196,000 Less than $198,000 $6,000 ($7,000 if 50 or older)
$196,000 up to $206,000 $198,000 up to $208,000 Contribution is reduced
$206,000 or more $208,000 or more No contribution allowed
Married filing separately (if you lived with spouse at any time during year) Less than $10,000 Less than $10,000 Contribution is reduced
$10,000 or more $10,000 or more No contribution allowed

Exceptions to IRA contribution limits

  • You generally can’t contribute more than you earn. If your taxable compensation for the year is $4,000, that’s also your IRA contribution limit.
  • If you’re a nonworking spouse, you can have what’s called a spousal IRA as long as your spouse earns enough to cover the contribution. That means if you both want to contribute the maximum to an IRA for 2020, and you’re both under 50, your spouse will need to earn at least $12,000 (to cover the $6,000 annual maximum for each of you).

The limit also doesn’t apply to transfers from other retirement accounts, such as those used to create a rollover IRA.  You should also note the deadline for IRA contributions for any given tax year is typically around April 15 — of the following calendar year.

For those wanting to open up a new IRA, click here for our low $5,000 minimum account value IRA. For those looking to rollover an IRA with $100,000 plus, click here.