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How Anyone Can Make an IRA Contribution

February 16, 2020

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IRA Savings Accounts - Something for Everyone

Even for those with 401K's

Everyone knows that it is a good idea to save money and if you can save on taxes too, even better. So let's review the IRA rules as tax season approaches since you have till April 15th to make a contribution (or later if you file for an extension). Those with higher incomes or have tax-deferred savings plans through their employers probably think they are not eligible. This may be the case for tax-deferred traditional IRA's, but there is a way to make an after-tax contribution, even if you have a 401K, 403B or pension plan.

Annual Contribution Limits

Most anyone can make an IRA contribution, the options you have depend on your income and whether you have a deferred savings plan through work. For 2019 and 2020 tax years, the maximum amount is $6,000 or $7,000 if you're age 50 or older.

Earnings Thresholds

If your earnings are below certain thresholds, you can contribute before-tax money to a traditional IRA or after-tax money to a ROTH. Here are the links to see if you qualify for a traditional contribution and for a ROTH. These thresholds are probably higher than you think, so review them carefully. If you fall in near the threshold, there is a chance to qualify for a partial contribution.

Choosing between a traditional and a ROTH

A traditional contribution is made with before-tax money thereby lowering your tax bill this year. It can be invested without tax implications. Only at the point of withdrawal are taxes assessed on both the original contribution and any profits. A ROTH is the opposite, the money is after-tax when it goes in and the contribution plus any future investment profits are not taxed when they are withdrawn. There is no rule for choosing one or the other, in either case the money cannot be withdrawn without penalty (usually 20% plus taxes) till you are 59.5 years old. If you are young or just planning on not withdrawing the money for many years, there is plenty of time to earn (hopefully) large returns through investing. In this case, the ROTH might be a good choice since none of the gains are taxed when they are withdrawn. If you want the tax reduction now instead of later or expect your tax rates to be a lot lower when you withdraw the money than they are now, the traditional might be the best choice. If you are not sure, you can split between the two, as long as the total does not exceed the annual limit.

Spousal IRA

If a married couple files jointly and one spouse does not work, the non-working spouse can also contribute to their own "spousal" IRA using their mate's income under the same parameters as a normal traditional and ROTH. This is often overlooked by many couples. For some, it offers the chance to contribute twice as much each year. Note the income thresholds are a bit different, they are here.

Employee Savings Plans

For most people with any type of tax-deferred plan through their employer, such and a 401K, 403B or state pension, there are fewer choices but a contribution can still be made. First, check your income using the IRS tables (same links above) to see if a traditional or ROTH is permitted, either in full or partial. If you are over the limits, there is still a way to make an after-tax contribution to a traditional and then convert it to a ROTH - no matter what your income is. The nickname for this process is a "back-door ROTH".

Back-Door ROTH

The first step is to make an after-tax contribution to a traditional IRA. The same annual limits apply. Then, anytime later convert it to a ROTH. Generally, it is better to make the conversion right away if possible. There are a couple of things to be aware of in the conversion. If you already have a traditional IRA, the conversion to a ROTH must be proportional versus the entire balance. For example, if you contribute $6,000 after-tax to an existing traditional IRA with $12,000 of before-tax contributions already in the account from previous years, the new balance is 1/3 after-tax and 2/3 before-tax. The subsequent $6,000 rollover to a ROTH has to be proportional to the amount of before and after-tax money. So, in the example, 1/3 or $2,000 rolls over non-taxed and 2/3 or $4,000 gets taxed when rolling over. If you do not have a traditional IRA, the entire year's contribution can be rolled to a ROTH. Note there is a special form to file for non-taxable traditional contributions, number 8606. Another important consideration, you can double this "back-door ROTH" process for a non-working spouse of a person with an employee savings plan.

IRA Compounding

A lot of people who make larger incomes might think the maximum allowable contribution amounts are too low to make a difference. The money does add up though long-term. For example, say you contribute $5,000 a year and the investments compound at 5% annually, the total after 10 years would be $66,034 and after 20 years $173,596. If a married couple each contributed to an IRA in the same way each year, after 10 years, combined they would be worth $132,067 and after 20 years, $347,192.


Of course, anyone making a contribution to an IRA must earn more than the contribution amount that year. There are some rules and limits if you are over 70.5 for each scenario. Note all the income thresholds are figured with what is called "modified adjusted gross income" or MAGI. It is basically your adjusted gross income from your tax return with tax-exempt interest and certain deductible expenses added back. Here and here are links to online calculators, but you probably want to engage your accountant to be sure.


I hope this was helpful, the savings part of investing should not be overlooked each year - consistency is important. Also, note that everything here is provided for informational purposes only, not tax or investment advice. Please do your own research, the IRS posts a lot of information online (plus they tend to change the numbers and rules regularly). And check with your accountant before making any final moves.

This blog article nor my advisory entity is not making any recommendations, only pointing out interesting strategies for consideration. Investors should do their own research and consult their advisor (and tax accountant in this case) before making any investment or tax decisions.


Notaro Wealth Advisory is a registered investment advisor. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this blog post are as of the date of the posting, are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like accounting, tax or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Notaro Wealth Advisory unless a client service agreement is in place.


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