IRAs and Roth IRAs share a special privilege that allows them to be one of the few tax benefits that can be used for a previous taxable year up until one files his or her individual tax return. For 2022, the maximum traditional IRA and Roth IRA contributions is $6,000 or $7,000 if you are at least age 50. Those numbers will increase to $6,500 and $7,500 respectively in 2023.
- The deadline is nearing for making IRA contributions for the 2022 taxable year
- IRA or Roth IRA contributions can be made until April 18, 2023
- Lower your tax bill and save for the future
When Can Self-Directed IRA & Roth IRA Contributions be Made?
Contributions can be made to a traditional IRA or Roth IRA for each year that one receives compensation. For any year in which one does not have compensation, contributions can’t be made to an IRA or Roth IRA unless one receives taxable alimony, nontaxable combat pay, military differential pay, or file a joint return with a spouse who has compensation.
IRA contributions can be made for a year at any time during the year or by the due date for filing the Federal Income Tax return (Form 1040) for that year, not including extensions. For most Americans, this means that contributions for 2022 must be made by April 18, 2023.
The Self-Directed IRA and/or Self-Directed Roth IRA contribution must be made by that same date for the 2022 taxable year, regardless if you have filed for an extension. Note, for tax years beginning after 2019, the old rule that one is not able to make contributions to a traditional IRA or Roth IRA for the year in which one reaches the age of 70½ and all later years has been repealed.
It is important to remember that when making a Self-Directed IRA or contribution between January 1 and April 15 (April 18 for 2023), it is good practice to tell the IRA custodian which year (the current year (2023) or the previous year (2022) the contribution is for. If one doesn’t tell the IRA custodian which year the IRA contribution is for, the sponsor can assume, and report to the IRS, that the contribution is for the current year (the year the sponsor received it)
In sum, if one has earned income during the year or has a spouse with earned income and is eligible to make a traditional IRA or Roth IRA contribution, the IRA contribution for the 2022 taxable year must be made before April 18, 2023. If one is depositing a check to make the IRA contribution, the check must be dated prior to that date. Whereas, in the case of an IRA contribution done via wire, the wire should be sent prior to that date as well.
What Income is Eligible to Contributed to a Self-Directed IRA?
In general, compensation for purposes of IRA contributions is what one earns from working. Below are the most popular forms of compensation:
- Wages, salaries, etc. Wages, salaries, tips, professional fees, bonuses, and other amounts one receives for providing personal services are compensation.
- Commissions. An amount one receives that is a percentage of profits or sales price is compensation
- Self-employment income. If you are self-employed (a sole proprietor or a partner), compensation is:
The net-earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of:
The deduction for contributions made on ones behalf to retirement plans, and The deduction allowed for the deductible part of your self-employment taxes
- Alimony and separate maintenance. For IRA purposes, compensation includes any taxable alimony and separate maintenance payments one receives under a decree of divorce or separate maintenance but only with respect to divorce or separation instruments executed on or be- fore December 31, 2018, that have not been modified to exclude such amounts.
- Nontaxable combat pay. If one was a member of the U.S. Armed Forces, compensation includes any nontaxable combat pay one received.
The following are several common forms of income that is not deemed compensation for purposes of the IRA contribution rules:
- Earnings and profits from property, such as rental income, interest income, and dividend income
- Pension or annuity income
- Deferred compensation received
- Income from a partnership for which one does not provide services that are a material income-producing factor
- Any amounts (other than combat pay) one excludes from income, such as foreign earned income and housing costs
Can I Get a Tax Deduction for Contributions to a Traditional Self-Directed IRA for 2022?
Now that you have a clear idea of what the IRS defines as “compensation.” The next question is can I get a tax deduction for compensation contributed to a traditional IRA? In general, the two advantages of contributing funds to an IRA are that the contribution is typically tax deductible, and the income and gains grow without tax, which is known as tax deferral. In determining if a traditional IRA contribution is tax deductible, you need to determine your income and your filing status as follows:
Filing Status – Single or Head of Household
- $68,000 or less of income = a full deduction.
- Greater than $68,000 of income but less than $78,000 = a partial deduction.
- $78,000 or more of income = no deduction.
Married Filing Jointly or Qualifying Widow(er)
- $109,000 or less of income = a full deduction
- more than $109,000 but less than $129,000 = a partial deduction
- $129,000 or more = no deduction
Married Filing Separately
- Less than $10,000 = a partial deduction
- $10,000 or more = no deduction
Can I contribute to a Self-Directed Roth IRA for 2022?
Unlike a traditional IRA contribution, which can offer a tax deduction, contributions to a Self-Directed Roth IRA are made with after-tax funds and are not tax-deductible. However, the primary advantage of saving through a Roth IRA is that so long as one is over the age of 59 1/2 and any Roth IRA has been opened at least five years, all Roth IRA distributions are tax-free.
Even if one has eligible compensation for purposes of making an IRA contribution, the IRS imposes certain income limitations on who can make contributions to a Roth IRA. The following summarizes the income level rules for making Roth IRA contributions:
Married filing jointly or qualifying widow(er)
- Less than $204,000 of income = one can contribute up to
$6,000 ($7,000 if you are age 50 or older)
- at least $204,000 but less than $214,000 of income = partial Roth IRA contribution is allowed
- $214,000 or more of income = no Roth IRA contribution
Married Filing Separately (and you lived with your spouse
at any time during the year)
- $0 income = one can contribute up to $6,000 ($7,000 if you are age 50 or older)
- more than zero (-0-) but less than $10,000 of income = partial Roth IRA contribution is allowed
- $10,000 or more of income = no Roth IRA contribution
Single, head of household, or married filing separately
- Less than $129,000 = one can contribute up to $6,000 ($7,000 if you are age 50 or older)
- at least $129,000 but less than $144,000 = = partial Roth IRA contribution is allowed
- $144,000 or more of income = no Roth IRA contribution
The Backdoor Roth IRA Workaround
For Roth IRA lovers, there is some good news. Starting in 2010, the Backdoor Roth IRA has allowed all income earners the ability to make a Roth IRA contribution. In other words, anyone wanting to make a Roth IRA contribution, irrespective of income, is now able to make a Self-Directed Roth IRA contributions.
The Backdoor Roth IRA is quite simple. One simply needs to make an after-tax IRA contribution, and then immediately contribute it to a Roth, without any tax implications. One thing to consider is that if one has other pretax IRAs, the amount of after-tax contributions that can be converted to Roth would be limited proportionally.
As you can see, you still have time to make a Self-Directed IRA or Roth IRA contribution for the 2022 taxable year. The time to make these contributions is ticking down, so it’s important to act fast. Making a pretax contribution will help lessen your tax burden, while a Roth IRA contribution will reap tax-free rewards in the future.