Most people dread owing taxes, but Tax Day can be an important deadline in helping to meet your financial goals. And we’re happy to report the IRS pushed the tax deadline for 2020 filings to May 17, 2021.
Contributions to your IRAs are a key factor in tax savings. In general, contributions are limited to $6,000 per year, with an additional $1,000 in catch-up contributions allowed for people aged 50+.
There are income limits to who can contribute to IRAs. Single filers must make less than $124,000 to make full contributions. Married joint filers must make less than $196,000. But there is a loophole and you’ll learn more about that below. For a SEP IRA, your contribution is limited to the lesser of 25% of self-employed earnings or $57,000.
Contributions to Traditional IRAs can be deducted within certain limits. Single individuals can take the full deduction at an adjusted gross income of $65,000 or less for 2020. Partial deductions can be taken above $65,000 but below $75,000. Once a single person hits $75,000 in income, a contribution is no longer deductible. For married people, the limits are $104,000 for full deduction, $104,000+ to $124,000 for partial, and no deduction for couples making $124,000 or more.
The most you can deduct on your business’s tax return for contributions to a SEP IRA is the lesser of your contributions or 25% of compensation.
Can’t Deduct Your Contributions? No Worries
Contributions to Roth IRAs are not deductible but the gains grow tax-free. That gives you tax-free income in retirement! So, if your contributions are not deductible anyway, consider going into a Roth IRA instead.
Even if you earn more than the eligible limit to contribute to a Roth IRA, that’s not a problem. The IRS code has a loophole called the Back-Door Roth Conversion. You can contribute the full amount to a Traditional IRA and immediately convert it to a Roth IRA. This one extra step completely bypasses the income limit and lets high earners participate in growing tax-free income in retirement!