fizkes | iStock | Getty Images
As the year draws to a close, those looking to cut their tax bills can consider making an individual contribution to the retirement account. However, before transferring the funds, there are rules and limits that investors need to know, say financial experts.
“Anyone can contribute to a traditional IRA – you, me, Jeff Bezos,” said certified financial planner Howard Pressman, partner at Egan, Berger & Weiner in Vienna, Virginia.
However, the ability to write off IRA contributions depends on two factors: participation in company pension plans and income.
More from Personal Finance:
Democrats want to remove Roth’s back door strategy for individual retirement accounts
These year-end tax moves can help you save no matter what happens in Congress
House Democrats propose new IRA and 401 (k) rules for the rich
For 2021, someone can deposit up to $ 6,000 into their IRA ($ 7,000 for someone 50 years old or older) provided they have that much income at any point before the tax filing deadline.
An investor and their spouse may be “aware” of writing off their entire IRA contributions if both spouses are not on an employer’s retirement plan, said Larry Harris, CFP and director of tax services at Parsec Financial in Asheville, North Carolina.
However, the rules change if one of the partners is insured and participates in the plan, including contributions from the employee or the company.
The participation may include, for example, employee contributions, company matches, profit sharing, or other employer contributions.
IRA withdrawal limits and expiry
Individual investors using a company retirement plan can claim a tax break on their entire IRA contribution if their modified gross adjusted income is $ 66,000 or less.
While there is still a partial deduction before they hit $ 76,000, once they hit that threshold, the benefit disappears.
Married couples enrolling together can get the full benefit for $ 105,000 or less, and their partial tax break is still available before it reaches $ 125,000.
There is an IRS table that covers each of these limits here.
Spouses who do not work outside the home can also contribute based on the income of the working spouse, known as the spouse IRA, Pressman added.
“This also has income restrictions, but they’re higher than those for workers covered by a plan,” he said.
Options if you can’t pull it off
While some investors may not qualify for IRA contribution deductions, there are other options that should be considered.
Non-deductible IRA contributions are a popular choice as some investors may be eligible to convert the after-tax deposit into a Roth IRA, known as a “back door” maneuver that bypasses income limits.
The tactic, however, can lie on the chopping block.
According to a summary published by the House Ways and Means Committee, House Democrats intend to crack down on the strategy after December 31, regardless of income levels.
But with the budget in motion, it’s unclear whether the provision will make it through negotiation.
Other options may be to take advantage of a company retirement plan, including catch-up contributions for those aged 50 and over, suggests Pressman.
After that, someone might consider investing in low-turnover index funds in a regular brokerage account.
“This account is not subject to retirement, which limits your access to funds, and if you make distributions, your growth will be taxed at lower capital gains tax rates than IRAs’ higher ordinary income rates,” he added.
“While you have to pay taxes on capital gains and dividends every year, low-turnover index funds should keep those taxes to a minimum,” he said.