Knowing the proper IRA deduction limits can help investors plan how to lower their income brackets and assist in reaching investment and retirement goals.
In this article:
- What Crucial Qualifications Remained in the 2019 Updates?
- Traditional IRA Tax Deduction for Retirement Accounts Sponsored by an Employer
- Traditional IRA Deduction Limits
- Roth IRA Tax Deduction
2019 IRA Deduction Limits: Updates Every Taxpayer Must Know
What Crucial Qualifications Remained in the 2019 Updates?
Here’s a list of everything that remains unchanged in the 2019 updates:
- All growth in an IRA remains tax-free.
- For IRAs funded by money that is already taxed, specifically Roth IRAs, the IRS considers the contribution as non-tax deductible.
- Tax advantages present in IRAs remain in place, with the only dramatic change being higher income limits for retirement accounts.
- No changes in investment asset rules, with self-directed IRAs able to invest in more varied investment options.
- Any IRA can increase or decrease a taxpayer’s income tax bracket.
- Investors can still contribute up to the maximum contribution limit but may not have the contributions deemed as tax deductible due to high modified AGI.
- Roth IRA’s status has largely remained.
- Modified AGI still determines the maximum contribution limits.
What is AGI? Also known as “Adjusted Gross Income,” this refers to the total income (gross) minus allowable standard deductions. AGI is used to determine one’s taxable income bracket.
In a nutshell, all possible investment assets remain for IRAs. Keeping an eye on both the AGI and the modified AGI has become more critical, as the taxable retirement contributions have a limit depending on the tax year’s current modified AGI.
To compute the Modified AGI, the taxpayer adds some deductions back to the equation. Examples of these include interest exempted from tax and foreign earned income not taxed.
Small business owners, employees, and self-employed professionals all use the modified AGI to see if their IRA contributions qualify as a full tax deduction.
Traditional IRA Tax Deduction for Retirement Accounts Sponsored by an Employer
For employees, a company-sponsored IRA is more complex when it comes to contributions. The IRS has the following guidelines for employees based on their marital status, tax filing scheme, and how much their modified AGI is.
|Marital Status and Tax Filing Scheme||Entire Contribution Tax-Deductible||Part of the Contribution Tax-Deductible||Contribution Not Tax-Deductible|
|Single Taxpayer / Head of Household||Modified AGI is $64,000 or below||Modified AGI is between $64,001 to $73,999||Modified AGI is $74,000 and above|
|Taxpayer Files Jointly With Spouse / Qualified Widow or Widower||Modified AGI of up to $103,000||Modified AGI is between $103,001 to $122,999||Modified AGI is $123,000 and above|
Taxpayer Files Separately From Spouse
|Modified AGI of up to $9,999||Modified AGI is $10,000 and above|
Traditional IRA Deduction Limits
Investors must remember two important numbers when they deduct IRA contributions from their AGI:
- For investors 49 years old or younger, the maximum 2019 IRA contribution is $6,000
- Taxpayers 50 years old and above have an additional $1,000 added to their limit, increasing their IRA contribution limit to $7,000. This is possible because of the IRS catch-up provision.
Remember, if the taxpayer contributes to an IRA that’s NOT sponsored by an employer, the investor can deduct the entire retirement contribution as long as the contributions lie within the limits.
Excess Contribution Taxes and Penalties
Contributing over the limit penalizes the investor with a 6% excise tax for every year the excess contribution remains.
Also, withdrawing these excess contributions may force the investor to pay another 10% penalty. The investor will be subjected to this penalty fee if they withdraw while they’re younger than 59 and ½.
Spousal IRA Contribution
Married investors can avoid going over the IRA contribution limits if one spouse opts to contribute to an IRA under the name of the other spouse. This system, known as a spousal IRA contribution, can help married investors reach a comfortable retirement.
Which Tax Year the Updated Figures Apply
- Tax Year 2019 — The updated figures apply for the 2019 tax year, which means that they will only apply for tax returns filed on April 2020 for the 2019 tax year.
- Tax Year 2018 — For the previous tax year, which is the 2018 tax year, investors need to deduct $500 in the IRA income limits.
Roth IRA Tax Deduction
As mentioned above, investments in a Roth retirement account are nondeductible IRA contributions.
Roth IRA investments defer taxes until distribution. This tax advantage provides better withdrawal systems for investors who predict that they will have a lower AGI or income tax bracket upon retirement.
Also, Roth IRAs don’t have a required minimum distribution under the law. This withdrawal rule can prove beneficial, as younger investors can withdraw without any penalties.
IRAs, whether Traditional or Roth accounts, provide tax-free growth for investments, among other tax benefits.
However, these tax benefits and regulations have limits and amendments that change with time. It’s essential that investors keep up with amendments to decrease their chances of making costly mistakes.
What do you think about these new IRA deduction limits? Share your thoughts with us in the comments section below.