In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses the 2021 tax deadline and some helpful tips to save on taxes.
Obviously, this episode was recorded before this year’s tax deadline. Hopefully, you were able to catch it before then! These IRA tax deadline tips are good for any year. Who doesn’t want to lower their tax bill each year? So take a listen as Adam explains some strategies you can use to do so!
IRA Contribution Rules
If you were unaware, the tax deadline is the same deadline for making IRA contributions for the previous year. Most years, that day is April 15, unless it falls on a weekend or holiday, in which case it gets pushed back to the next weekday. This year, 2021, the IRS pushed back the deadline one month to May 17. This gave individuals some more time to contribute funds to their IRA. Obviously, these last 18 months or so has been rough on many. If you were able to contribute to your retirement plan, great! If not, that’s okay too. Just look to get back on track in the coming months and years.
For both 2020 and 2021, you are allowed to contribute up to $6,000 to an IRA. Plus, if you are at least age 50, you may contribute an additional $1,000 to the plan. The amount you contribute to a pretax, or traditional IRA, is generally excluded from your taxable income for the year. This is good news for those looking to lessen their tax burden for the year.
In order to contribute to an IRA, or any retirement plan really, you must have earned income. Generally, that income will come from your job, self-employment income or certain disability benefits. It does not include income, such as interest, social security or unemployment. So long as you have earned income, you can contribute to an IRA!
What if you don’t have earned income, but your spouse does? Assuming your spouse has enough earned income, he or she can contribute on your behalf. The Spousal IRA allows one to contribute to a spouse, up to the annual limit. Keep in mind, even though your spouse is contributing to the IRA, it is your IRA. Therefore, you spouse can contribute $6,000 to his or her IRA and another $6,000 to your IRA. This is one of the instances where the IRS is generous. Just because one spouse is not working, for whatever reason, they will allow you to put money aside for retirement. Plus, it doubles the amount one can deduct from his or her tax bill for the year!
The tax break only comes if you eligible for the tax deduction of the traditional IRA. Essentially, if you earn too much money, you cannot contribute pretax funds to an IRA. This only applies if you or your spouse have access to a workplace retirement plan, such as a 401(k) or 403(b). They keyword there is access. It doesn’t matter if you contribute to the plan. Since it is available to you, the IRS won’t let you double down on your tax deductions by contributing pretax money to a traditional IRA.
If you are single with access to another plan and earn more than $76,000, you cannot contribute to a traditional plan. If you are married and have access to a plan, the limit is $125,000. Lastly, if your spouse has access to a plan, the limit is $208,000. If you are above those thresholds, you cannot contribute to a pretax IRA.
Use the Backdoor
Although you won’t receive a tax break, you can still put aside money in an IRA by using the “backdoor.” If you are single and earn more than $140,000 or married filing jointly making $208,000 or more, you cannot directly contribute to a Roth IRA either. A Roth is funded with after-tax money so there is no deduction. However, all qualified distributions are tax free. Again, if you are over these limits, there is one other option to get money into an IRA.
You can make after-tax contributions to a traditional plan. There is no benefit to this unless you utilize the “Backdoor Roth IRA” strategy. Once you contribute those funds to a traditional plan, you can immediately convert to a Roth. There are no income restrictions for IRA conversions. When done right away, meaning there have been no gains on those contributions, you will not have any tax liability on the conversion. However, if you do not convert right away, and start seeing gains, you will owe taxes on those gains only. That’s why you should never contribute after-tax funds to a traditional IRA and leave them there.
Please note the numbers used above are for the 2021 taxable year. The amounts are similar for 2020, and will be adjusted slightly next year and thereafter. Generally, the amounts rise about $500-1,000 each year.
IRA Tax Deadline Tip for the Self-Employed
If you are self-employed, you can also contribute to a self-employed retirement plan, like a SEP IRA, SIMPLE IRA or even a Solo 401(k). Contributions must be made before you file a return for your business. There is a caveat, once January 1 rolls around, you can only make a profit sharing contribution. That amount is limited to 20% or 25% of your compensation. Once the calendar year is over, you cannot contribute as the employee. For example, you cannot make the maximum $19,500 employee deferral contribution (under age 50) to a Solo 401(k).
Though the time has now passed, you have until you file your return to set up a plan for your small business. Just another point to keep in mind as you near the tax deadline each year. If you see you have a large tax bill, this one way to lower it if you are self-employed.
Although we didn’t get this episode up on the blog in time this year, these IRA tax deadline tips are good to keep in mind every year. If you are looking to save on taxes and also put aside money for the future, look no further than your IRA. It’s a win-win situation, even if you don’t receive that immediate tax break.