Income Requirements for IRA Contributions Sponsored By:Todd Carmack
Nobody expected the year that we all experienced in 2020 – the pandemic caused store closures, reduced hours for workers, and other changes for Americans. Consequently, this has led to lots of questions regarding IRA contributions and earnings. For example, we recently saw somebody ask whether they could make an IRA contribution after not earning as much as normal (or anything) in 2020.
If you’ve seen limits mentioned regarding IRAs, this is normally referring to the contribution limit. For those under 50, you can only contribute as much as you’ve earned up to a limit of $6,000. Those over 50 have a slightly higher limit of $7,000. It doesn’t matter if you pay money into a Roth IRA, a Traditional IRA, or both. The most important detail is that you cannot exceed the contribution limit.
Don’t worry. Your IRA contribution limit isn’t affected by other retirement plans. For example, any IRA you hold will act independently of a 401(k). Although your contribution is unaffected by other retirement plans, the same can’t be said for deductions and taxes (so bear this in mind!).
As long as you have earned income, you can make IRA contributions, even if it isn’t deductible for tax purposes. Depending on age, individuals can contribute $6,000 or $7,000, and this equates to a total of $12,000 or $14,000 for married couples. In the introduction, we mentioned IRA contributions after not earning anything in 2020. Thankfully, it doesn’t matter who earns the required amount for contributions. If the combined income of the couple is the required $12,000 or $14,000, both spouses can contribute their individual $6,000 or $7,000. Yes, this is true even if one spouse doesn’t earn a cent.
During IRA contribution calculations, you’ll see the phrase ‘earned income,’ which is seen as all money earned from work. Therefore, it includes wages and salaries as well as bonuses, commissions, and tips. If you’re self-employed, it’s the net positive income from all work activities. Though these are the most common examples, it also includes:
Difficulty-of-care payments (designed for foster care workers)
Taxable alimony (received)
Taxable non-tuition fellowship
Taxable stipend payments
What sources of income don’t qualify towards earned income? Well, all sources unrelated to your work. This includes dividends or interest on stocks and investment income. In other words, the income you’re likely to find on 1099-DIV and 1099-INT forms. You also can’t claim capital gains or income from rent as earned income for contribution calculations. Likewise, you can’t count retirement annuity or account distributions, income from profit-sharing schemes, pension payments, or IRA distributions.
Other forms of excluded income include:
Unemployment compensation
Deferred compensation
Child support
Life Insurance proceeds
Disability insurance income
Summary
In the past, plenty of people thought they had gotten around the contribution limits only to see an excess contribution on their account – you should correct an error like this quickly. April 15th was the deadline to correct all 2020 contributions for those who wanted to avoid a penalty.
What happens if you contribute too much? If you over-contribute and fail to correct the error, the excess is charged at 6% for every year it remains in the Roth IRA or Traditional IRA. If you’ve looked back and found an error from a previous year, you’ll need Form 5329. This will update Schedule 2 on your 1040 with the right information. Ultimately, the way you fix an error can change depending on your age, the excess amount, and other factors.
Speak with your financial advisor and the company holding the account to correct any errors and get your IRA back on track. Similarly, a financial advisor will help with everything discussed in this guide. If you’re confused about your IRA contributions or don’t know how to contribute correctly, contact them for tailored help!
Contact Information:
Email: [email protected]
Phone: 6232511574
Bio:
I grew up in Dubuque, Iowa, where I learned the concepts of hard work and the value of a dollar. I spent years in Boy Scouts and achieved the honor of Eagle Scout. I graduated from Iowa State University and moved to Chicago and spent a few years managing restaurants. I then started working in financial services and insurance helping families prepare for the high cost of college for their children. After spending years in the insurance industry, I moved to Arizona and started working with Federal Employees offing education and options on their benefits. I became a Financial Advisor / Fiduciary to further help people properly plan for the future. I enjoy cooking and traveling in my free time.
Disclosure:
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