Are There Retirement Savings Options If My Income Precludes IRA Contributions?

Rules for Roth IRAs

You can contribute to a traditional individual retirement account (IRA) no matter how high your income. There are income limits, though, for contributing to Roth IRA accounts. Money saved in Roth retirement accounts is post-tax income. That is, income taxes are owed for the year in which the money is paid into the account. When the money is withdrawn, presumably after retirement, no further taxes are owed on either the money contributed or the returns earned.

There are upper-income limits, and they are phased in as follows for tax years 2020 and 2021:

• For 2020, single taxpayers can make a reduced contribution if they have MAGI between $124,000 and $139,000. For married couples, the range is $196,000 to $206,000.
• For 2021, single taxpayers can make a reduced contribution if they have MAGI between $125,000 and $140,000. For married couples, the range is $198,000 to $208,000.

Contribution Limits

Regardless of income, there are limits to how much you can contribute each year to an IRA, whether it is a traditional or a Roth IRA.

The maximum contribution allowed for tax years 2020, and 2021 is $6,000, although people age 50 or above can add an additional $1,000 as a “catch-up contribution.

You can add money to a traditional IRA above the amount that is tax-deductible. If you choose to make a nondeductible contribution to your traditional IRA, you should file IRS Form 8606 to report the contribution as nondeductible to the IRS and to keep track of the nondeductible balance (basis) in your traditional IRA.

You would also need to file Form 8606 for each subsequent year you withdraw assets from the traditional IRA to determine the taxable portion of the distribution.

As a result of the passage of the SECURE Act by the U.S. Congress, from 2020 and later, there is no longer an age limit on making regular contributions to traditional or Roth IRAs. In the past, if you were 70½ or older, you couldn’t make regular contributions to a traditional IRA.

Roth IRA Possibilities

If you are not eligible to deduct the contribution to a traditional IRA, and you are eligible to contribute to a Roth IRA, then the Roth may be the better choice.

This is because the earnings on Roth IRA assets accrue tax-deferred and are tax-free if distributions are qualified. On the other hand, the earnings in a traditional IRA accrue tax-deferred but are taxed when distributed.

Special Considerations: Investing in a Taxable Account

Another way to invest for retirement is to trade in individual stocks or buy a fund containing a basket of securities, such as exchange-traded funds (ETFs) and index mutual funds. If you sell an investment that you have held for over a year at a gain, you may only have to pay the long-term capital gains tax. This rate is typically lower than the tax rate on ordinary income.