Utilizing the Increased IRA Contribution Limits to Reduce Tax

2018-11-14T13:40:03+00:00

The IRS has finally increased the annual contribution limits for IRAs. Since 2013, individuals could make contributions to traditional and roth IRA accounts up to $5,500 (or $6,500 if over the age of 50 using the catch-up contribution provision). As a result of the increase, the allowable contribution amount will be $6,000 beginning in 2019, or $7,000 for those over the age of 50. Depending on their income tax situation, an individual could receive a deduction to their adjusted gross income (AGI) on their tax return for all or part of the contribution made to a traditional IRA in a particular year.

The tax code generally allows contributions to a traditional IRA plan in an amount equal to the lesser of the annual contribution limit or 100% of the individual’s taxable compensation. If a taxpayer is married, each spouse can make a contribution up to the annual contribution limits provided that the compensation of both spouses combined is at least equal to the amount contributed. Once an individual reaches age 70 ½, contributions to a traditional IRA, whether deductible or not, are no longer permitted. The deductibility of traditional IRA contributions depends on several factors; first, whether or not the individual has a retirement plan with their employer, and second, the filing status of the taxpayer.

The chart below summarizes the rules in effect for 2019 if the individual taxpayer has a retirement plan with an employer when determining the contribution deduction limits that will apply.

Filing Status Full Deduction Available Partial Deduction Available No Deduction Available
Single or Head of Household If Modified AGI is $64,000 or less If Modified AGI is over $64,000 but less than $74,000 If Modified AGI is over $74,000
Married Filing Jointly or Qualifying Widow(er) If Modified AGI is $103,000 or less If Modified AGI is over $103,000 but less than $123,000 If Modified AGI is over $123,000
Married Filing Separately N/A If Modified AGI is less than $10,000 If Modified AGI is over $10,000

If the individual does not have a retirement plan with an employer, the chart below summarizes the rules in effect for 2019 when determining the contribution deduction limits that will apply.

Filing Status Full Deduction Available Partial Deduction Available No Deduction Available
Single, Head of Household or Qualifying Widow(er) For any Modified AGI N/A N/A
Married Filing Jointly or separately with a spouse not covered by an employer plan For any Modified AGI N/A N/A
Married Filing Jointly with a spouse covered by an employer plan If Modified AGI is $193,000 or less If Modified AGI is over $193,000 but less than $203,000 If Modified AGI is over $203,000
Married Filing Separately with a spouse covered by an employer plan N/A If Modified AGI is less than $10,000 If Modified AGI is over $10,000

In situations where an individual may be unsure of whether or not they qualify, there are planning opportunities to consider. Married individuals should consider making spousal IRA contributions in a year where only one spouse may be working. If the income limits are met, this can double the available deduction to $12,000 (or $14,000 if both spouses are over 50 years old making catch-up contributions). If an individual is self-employed, consider utilizing business expenses and the home-office deduction, if available, to reduce the earned income. In addition, consider other retirement options that may exist for self-employed individuals, which may increase the retirement deduction available. A SEP IRA is a retirement plan commonly used by self-employed individuals which allows for a higher deduction.

For individuals with low income for the year, consider taking advantage of the non-refundable Saver’s Credit. This credit is available to individuals when income is less than $64,000 if married filing joint, $32,000 if single or married filing separately, or $48,000 if filing as head of household, and can be up to 50%, 20% or 10% of the total contribution.

When the deduction is available, an individual should consider making contributions to a traditional IRA. This will allow an individual to both save towards retirement and reduce the amount of tax paid in the year of contribution. As an added benefit, the timeline for making an IRA contribution is the due date of the tax return for the year the contribution will be deducted. This means that the 2019 due date for making a contribution to an IRA is April 15, 2020 when the tax return is due. Planning can be done throughout the year to adjust income to maximize the contribution deduction.

In addition, the ability to analyze the cost benefit of maxing out the deduction exists at the time of filing the tax return. With an overall decrease in tax rates due to the Tax Cuts and Jobs Act (TCJA), and the 10% increase in the IRA contribution limit, this is the perfect time to evaluate ways to make use of this option when planning for retirement and lowering taxes.

Please contact a member of the HBK Tax Advisory Group with any questions.

About the Author(s)

Sarah is a tax manager with HBK's Tax Advisory Group. She works out of the firm's Naples, Florida office. Her background includes tax compliance and tax consulting for high net worth individuals, family groups, trusts, estates, and gift tax issues. Sarah's experience also includes aiding in the year end planning process as well as the preparation and review of individual, trust, gift, estate, small family owned partnerships and small S-Corporation returns. She has completed extensive research in the gift and estate tax area and has contributed to the publication of an international estate and gift tax planning handbook as well as a tax publication in the Naples Daily News Estate Planning Insert. She earned a Bachelor of Science degree in Accounting and a Master of Science degree in Taxation Accounting from St. John’s University in Queens, New York and is licensed to practice accounting in Florida, New York and New Jersey. Sarah is also Treasurer of the Naples Estate Planning Council.

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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