Q: I am 73 years old and I am free. Looking at my taxes for 2020, I think I can save a few bucks by putting money in the IRA. I don’t have a 401 (k) or anything like that, and I earn something by working part-time, so if I understand it, I can now decline an IRA contribution. Is that true? Is that smart?
– Gene on mobile
A .: Gene,
Older workers, regardless of age, could always contribute to the Roth IRA if their income was within certain limits, but if they were older than 70, they could not contribute to the traditional IRA. The 2019 SECURE Act eliminated this age limit so that people over the age of 70 can contribute to a traditional IRA if they have earned income. Earned income is basically earnings from work and certain other payments such as alimony from divorce settled in 2018 or earlier.
Whether the contribution will be smart depends on the details of your tax return and other factors. You should discuss the details with your advisor, but I will touch on a few factors here.
The contribution for 2020 can be 100% of the realized income up to a maximum of 7,000 USD for 2020 (6,000 USD for all persons under the age of 50) and can be made no later than April 15, 2021. Whether you refuse the contribution depends on your Modified Adjusted Gross income (MAGI) and whether you participate in a qualified retirement plan. Without the 401 (k) number, you are probably not a participant in the plan.
For 2020, single taxpayers who are not participants in the qualifying plan can make tax deductions. Participant taxpayers must have a MAGI of $ 64,999 or less to decline a full contribution. Such participants with MAGI over $ 75,000 cannot refuse any of their contributions, and those with MAGI receive a partial deduction.
Unlike a Roth IRA or 401 (k) at your employer, you will still need to make the required minimum distribution (RMD). Regardless, making a deductible contribution can still reduce your taxes.
One fight you may struggle with is if you make a qualified charity distribution (QCD) for charity from a traditional IRA. For those over the age of 70, this is a popular and effective way to donate to charity, as donations can be counted in RMD, but are excluded from income. Once you make a deductible contribution to the IRA, any of your QCDs are included in the income until the amount of the QCD is equal to the cumulative total amount of all deductible IRA contributions from the year you completed 70½.
For example, if you give a deductible contribution of $ 7,000 in 2020 and 2021, the first $ 14,000 of QCDs are not tax-free distributions. You may or may not receive some tax benefits from these donations as a detailed deduction.
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Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne and Tampa, Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Talk to your advisor about what is best for you. Some questions are arranged for brevity.