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How to Make a Legit $28,000 IRA Contribution

A colleague of mine said a 60-year-old couple who is a client of his just made a $28,000 IRA contribution. Is this some kind of new rule? I thought the maximum annual contribution was $6,000, with a potential additional $1,000 catch-up contribution for someone age 50 and over?

Highlights of Recommendations

  • A $28,000 IRA contribution for the couple is possible, courtesy of a combination of several IRS rules covering
  1. carry-back and current year contributions,
  2. spousal contributions and
  3. catch-up contributions.
  • From January 1, 2021 to May 17, 2021[1], it is potentially possible for a traditional or Roth IRA owner age 50 and over to make a $14,000 contribution: $7,000 as a 2020 carry-back contribution and $7,000 as a 2021 current-year contribution. That means a married couple filing a joint tax return could potentially make a $28,000 IRA contribution, with $14,000 going to each spouse’s respective IRA (either Roth or Traditional).
  • When making the contributions it is important to clearly designate to the IRA administrator that a portion is a carry-back contribution for 2020 and a portion is a 2021 current-year contribution in order to avoid having the full amount treated as a current-year contribution and, subsequently, an excess contribution for 2021.
  • Such a large combined contribution would only be possible if
    • The couple had not previously made a 2020 contribution to a traditional or Roth IRA,
    • Each spouse was age 50 or older as of 12/31/2020,
    • The couple has earned income for 2020 and 2021 to support the contributions, and
    • For a Roth IRA contribution, the couple’s income is under the modified adjusted gross income (MAGI) limits for Roth IRA contribution eligibility (see below).
  • Whether the traditional IRA contributions would be tax deductible depends upon “active participation” of either spouse in a workplace retirement plan[2] and the couple’s MAGI.
  • Please see the applicable MAGI ranges in the following chart.
Traditional IRA Eligibility for Deductible Contributions
Taxpayer Category 2021 MAGI Phase-Out Ranges 2020 MAGI Phase-Out Ranges
Married active participant filing a joint income tax return $105,000-$125,000 $104,000-$124,000
Single active participant $66,000-$76,000 $65,000-$75,000
Married active participant filing separate income tax return $0-$10,000 $0-$10,000
Spouse of an active participant $198,000-$208,000 $196,000-$206,000

Roth IRA Contribution Eligibility

Taxpayer Category 2021 MAGI Phase-Out Ranges 2020 MAGI Phase-Out Ranges
Married filing a joint income tax return $198,000-$208,000 $196,000-$206,000
Single individuals $125,000-$140,000 $124,000-$139,000
Married filing separate income tax return $0-$10,000 $0-$10,000

 

Conclusion

The deadline for making 2020 traditional or Roth IRA contributions is May 17, 2021. That means there is a window of opportunity that allows eligible couples to double up on IRA contributions (for 2020 as a carry-back contribution and one for 2021 as a current-year contribution) to the tune of $28,000.

 

 

[1] Usually, April 15th, but the IRS extended the 2020 tax filing deadline to May 17, 2021

[2] See Active Plan Participant and IRA Contributions

 

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How is it possible to make a $27,000 IRA contribution by April 15, 2019?

“A colleague of mine said a 60-year-old client couple of his just made a $27,000 IRA contribution. How is that possible without creating an excess contribution?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Massachusetts is representative of a common inquiry related to IRA contributions.

Highlights of the Discussion

There is a window of opportunity from January 1 through April 15, 2019, for a married couple to be able to contribute up to $27,000 at one time to their IRAs. Sizeable contributions like this are possible each year during tax season because of the carry-back and current-year IRA contribution rules, combined with the catch-up contribution limits for those ages 50 or more.

Here’s how it breaks down. From January 1 to April 15, 2019, it is potentially possible for a traditional or Roth IRA owner age 50 and over to contribute $6,500 as a 2018 carry-back contribution, and $7,000 as a 2019 current year contribution, for a total of $13,500.[1] That means a married couple filing a joint tax return could potentially make combined IRA contributions totaling $27,000, with $13,500 going to each spouse’s respective IRA.

Please be aware of the caveats. Such a large contribution would only be possible if the couple

  • Had not previously made 2018 contributions to traditional or Roth IRAs;
  • Each spouse was age 50 or greater as of December 31, 2018;
  • The couple has earned income to support the contributions;
  • For a Roth IRA contribution, had modified adjusted gross income (MAGI) under the limits for Roth IRA contribution eligibility; and
  • For a traditional IRA contribution, was under age 70½. (Whether a couple’s traditional IRA contributions would be tax deductible depends upon the couple’s MAGI and participation in a retirement plan at work. Please see the applicable MAGI ranges below.
Roth IRA Contribution Eligibility 2018 and 2019
Taxpayer Category 2018 MAGI Phase-Out Ranges 2019 MAGI Phase-Out Ranges
Married filing jointly $189,000-$199,000 $193,000-$203,000
Single individuals $120,000-$135,000 $122,000-$137,000
Married filing separately $0-$10,000 $0-$10,000
Traditional IRA Eligibility for Deductible Contributions
Taxpayer Category 2018 MAGI Phase-Out Ranges 2019 MAGI Phase-Out Ranges
Married active participant filing jointly $101,000-$121,000 $103,000-$123,000
Single active participant $63,000-$73,000 $64,000-$74,000
Married active participant filing separately $0-$10,000 $0-$10,000
Spouse of an active participant $189,000-$199,000 $193,000-$203,000

When making IRA contributions during the period between January 1 and April 15th of a given year, it is important for an investor to clearly designate to the IRA trustee or custodian for what year a contribution is being made (e.g., what portion represents a carry-back contribution for the preceding year and what portion represents a current-year contribution) in order to avoid having the full amount treated as a current-year contribution and, subsequently, an excess contribution.

Conclusion

Because of the carry-back and current-year IRA contribution rules, there is a window of opportunity through April 15th that allows eligible investors to double up, seemingly, on IRA contributions. Investors interested in maximizing their contributions in this way should consult their tax advisors regarding their particular circumstances.

 

[1] For eligible individuals under age 50, the maximum IRA contribution limit is $5,500 for 2018 and $6,000 for 2019.

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