ComplianceTax & AccountingMarch 14, 2019

IRA regular contributions: eligibility, contribution limits, and deductibility

Overview

As taxpayers focus their attention on preparing their 2018 tax return, many will assess whether to contribute to an individual retirement account (IRA) for 2018. This article will review the deadline for making traditional and Roth IRA regular contributions, regular contribution eligibility, the 2018 and 2019 regular contribution limits, and traditional IRA regular contribution deductibility.

Traditional and Roth IRA regular contribution eligibility

The following chart shows the regular contribution eligibility requirements applicable to traditional and Roth IRAs.

Eligibility
Traditional IRA Roth IRA
Compensation Compensation
Younger than age 70½ Income Limits

Compensation Requirement

For IRA regular contribution eligibility purposes compensation includes wages, salaries, tips, bonuses, commissions, self-employment net profit, taxable alimony and separate maintenance (see “Note” below), nontaxable combat pay, and a spouse’s compensation. It does not include passive income such as interest, dividends, earnings from property, IRA income, pension income, or social security income.

Example

Ronald, age 68 and single in 2018, had income from his pension, social security, gains from the sale of stock, and interest on some Certificates of Deposit. Because none of his income qualifies as compensation, Ronald cannot contribute to a traditional or Roth IRA for tax year 2018. Assuming no changes in compensation, Ronald cannot make regular contributions for future tax years either.

Note: Under the Tax Cuts and Jobs Act of 2017, alimony received through a divorce or separation instrument executed after December 31, 2018, will not be taxable to the recipient, and therefore will not be considered compensation for purposes of making an IRA regular contribution.

Traditional IRA—younger than age 70½ requirement

An individual may not make a traditional IRA regular contribution for the year he or she attains age 70½ or any subsequent year.

Example

Joe, born April 10, 1948, attained age 70½ in 2018. Even though Joe had compensation in 2018, he cannot make a traditional IRA regular contribution for 2018 or subsequent tax years.

Example

Josie, born July 3, 1948, attains age 70½ in 2019. Assuming Josie had compensation in 2018, she can make a traditional IRA regular contribution for 2018 by her tax-filing deadline of April 15, 2019. However, she cannot make a traditional IRA regular contribution for 2019 or subsequent years.

Roth IRA—modified adjusted gross income (MAGI) requirement

Although there is no age restriction to make a Roth IRA regular contribution, an individual whose MAGI is too high will be restricted from making a Roth IRA regular contribution. An individual’s tax filing status and MAGI will determine whether he/she is eligible to make a full contribution, a partial contribution, or no contribution to his/her Roth IRA. These MAGI limits are subject to an annual cost of living adjustment (COLA) and are as follows for 2018 and 2019:

Roth IRA Eligibility MAGI Thresholds
Filing Status Tax Year Full Contribution Partial Contribution No Contribution
Single 2018 ≤ $120,000 Between $120,000 and $135,000 ≥ $135,000
2019 ≤ $122,000 Between $122,000 and $137,000 ≥ $137,000
Married, Joint 2018 ≤ $189,000 Between $189,000 and $199,000 ≥ $199,000
2019 ≤ $193,000 Between $193,000 and $203,000 ≥ $203,000
Married, Separate 2018 N/A < $10,000 ≥ $10,000
2019 N/A < $10,000 ≥ $10,000

Example

Jane, age 42 and single, had compensation and MAGI of $51,000 in 2018. Because her income was less than $120,000, Jane may make a full Roth IRA regular contribution for 2018 by April 15, 2019. Assuming Jane’s MAGI remains below $122,000 for 2019, she can also make a full Roth IRA regular contribution for 2019.

Example

Alex and Sherry, ages 52 and 48 respectively, are married, had compensation and MAGI of $128,000 in 2018, and will file a joint federal income tax return for 2018. Because their 2018 joint MAGI is less than $189,000, both Alex and Sherry can make a full Roth IRA regular contribution for 2018 by April 15, 2019. Assuming their MAGI remains below $193,000 for 2019, they both can also make a full Roth IRA regular contribution for 2019.

Traditional and Roth IRA regular contribution limits

The following chart shows the 2018 and 2019 traditional and Roth IRA regular contribution limits.

Tax Year Standard Limit Younger Than Age 50 Catch-Up Contribution Age 50 or Older Contribution Limit Age 50 or Older
2018 $5,500 $1,000 $6,500
2019 $6,000 $1,000 $7,000

An individual may choose to deposit an amount up to his/her regular contribution limit to either a traditional IRA or a Roth IRA, or he/she may split the regular contribution limit amount between a traditional and Roth IRA. If making a regular contribution to both a traditional and a Roth IRA, the total amount contributed cannot exceed the contribution limit.

Example Continued

Jane, from an earlier example is age 42, single, and had compensation and MAGI of $51,000 in 2018. Jane’s 2018 traditional and Roth IRA aggregate contribution limit is $5,500. Assuming Jane has compensation for 2019, her aggregate traditional and Roth IRA contribution limit increases to $6,000.

Example Continued

Alex and Sherry, from an earlier example are ages 52 and 48 respectively, are married, had compensation and MAGI of $128,000 in 2018 and will file a joint federal income tax return for 2018. Alex’s 2018 traditional and Roth IRA aggregate contribution limit is $6,500 and Sherry’s 2018 traditional and Roth IRA aggregate contribution limit is $5,500. Assuming Alex and Sherry have the same compensation and MAGI for 2019, Alex’s aggregate traditional and Roth IRA contribution limit increases to $7,000 and Sherry’s aggregate traditional and Roth IRA contribution limit increases to $6,000.

Traditional IRA deductibility thresholds

An individual is eligible to make a traditional IRA regular contribution if he/she has compensation and is younger than 70½ the entire year for which the contribution is made. However, a regular contribution made to a traditional IRA may or may not be deductible. IRA owners who are active participants in certain employer plans whose MAGI is too high will be restricted from taking a deduction for a traditional IRA regular contribution. These MAGI limits are subject to an annual COLA and are as follows for 2018 and 2019:

Traditional IRA Deductibility MAGI Thresholds
Filing Status Tax Year Full Deduction Partial Deduction No Deduction
Single 2018 ≤ $63,000 Between $63,000 and $73,000 ≥ $73,000
2019 ≤ $64,000 Between $64,000 and $74,000 ≥ $74,000
Married, Joint 2018 ≤ $101,000 Between $101,000 and $121,000 ≥ $121,000
2019 ≤ $103,000 Between $103,000 and $123,000 ≥ $123,000
Married, Joint (not active participant but spouse is) 2018 ≤ $189,000 Between $189,000 and $199,000 ≥ $199,000
2019 ≤ $193,000 Between $193,000 and $203,000 ≥ $203,000
Married, Separate 2018 N/A < $10,000 ≥ $10,000
2019 N/A < $10,000 ≥ $10,000

Example

Continuing with an earlier example, Jane is age 42, single, had compensation and MAGI of $51,000 for 2018, and was an active participant in her employer’s 401(k) plan. Jane meets the eligibility requirements to make a traditional IRA regular contribution, and because her 2018 MAGI was less than $63,000, she is eligible to fully deduct a traditional IRA regular contribution for 2018. Jane is also eligible to make a Roth IRA contribution. So, preferably with the guidance of a tax professional, Jane may choose to make either a deductible traditional IRA contribution, a Roth IRA contribution which is not deductible, or may split her contribution between the two. Only the portion she contributes to the traditional IRA is eligible to be deducted.

Example

Continuing with an earlier example, Alex and Sherry, ages 52 and 48 respectively, are married and had compensation and MAGI of $128,000 in 2018. During 2018, Alex participated in an employer-sponsored retirement plan and Sherry did not. Since their 2018 MAGI was more than $121,000 any traditional IRA regular contribution made by Alex will not be deductible. However, Sherry was married to an active participant but was not an active participant herself, and any traditional IRA contribution she makes is eligible to be deducted since their MAGI was below $189,000. So, with the guidance of a tax professional, Alex may decide to contribute to a Roth IRA for 2018. Sherry may choose to either make a traditional IRA deductible contribution, forego the deduction and make a Roth IRA contribution for 2018, or make regular contributions to both the traditional and Roth IRAs but not in excess of $5,500 between the two.

IRA contribution deadline

The IRA regular contribution deadline is an individual’s tax-filing deadline, excluding extensions (generally, April 15 following the year for which the contribution is made).

When accepting regular contributions between January 1 and an individual’s tax-filing deadline, it’s always important to ask which tax year (i.e., previous or current) the regular contribution is intended for, and to document it properly.

Making contributions for both 2018 and 2019

Occasionally, IRA owners make contributions for both the previous and current year at the same time. This generally can only occur between January 1 and April 15.

Example

Jane from an earlier example, is age 42, single, and had compensation and MAGI of $51,000 for 2018. Jane has decided to contribute to a traditional IRA. On March 12, 2019, Jane decided to make both her 2018 and 2019 contributions, and subsequently wrote a check to ABC Bank for $11,500. ABC Bank documents a $5,500 contribution for 2018 to her traditional IRA, and separately documents a $6,000 contribution for 2019 to the same traditional IRA. Jane will deduct her 2018 $5,500 traditional IRA regular contribution on her 2018 federal income tax return. Assuming Jane’s MAGI is below $64,000 in 2019, she will again qualify to deduct her entire 2019 traditional IRA regular contribution on her 2019 federal income tax return.

Conclusion

An IRA owner, not an IRA custodian/trustee, is responsible for determining his/her regular IRA contribution eligibility, whether he/she can deduct all or a portion of a traditional IRA regular contribution, or the amount of the Roth IRA regular contribution he/she is eligible to contribute. Although an IRA custodian/trustee can assist individuals by educating them on IRA rules, IRA owners should make their IRA decisions with the guidance of his/her tax or legal professional.

For an opportunity to learn more about IRAs and other tax-advantaged accounts including Health Savings Accounts and Coverdell Education Savings Accounts, consider our on-demand video training offered on a variety of topics. Go here to learn more about training opportunities available to you, or call us at 1-800-552-9408.

Mike Schiller
Manager, Specialized Consulting, Tax Advantaged Accounts
With more than 22 years of experience, Mike has worked closely with hundreds of financial organizations to help them create, implement, and maintain their tax-advantaged accounts program.