SECURE Act Allows Traditional IRA Contributions Past Age 70½
One of the most significant changes affecting IRAs as a result of the Setting Every Community Up for Retirement Enhancement (SECURE) Act (part of the Further Consolidated Appropriations Act, 2020, enacted late December 2019) is the repeal of the age limit on Traditional IRA contributions. Effective for 2020 and later taxable years, individuals of any age can make Traditional IRA contributions, if otherwise eligible. The only requirement now is that the individual has eligible compensation.
Earned Income
Eligible compensation (generally earned income) must have been earned during the year for which the individual is making the contribution. Earned income includes wages, salaries, tips, professional fees, bonuses, and other income-generating streams received from working. Commissions, self-employment income, nontaxable combat pay, and military differential pay also are eligible compensation. For 2020 and later tax years, certain stipend, fellowship, and similar payments to graduate students, and difficulty-of-care payments to caregivers, can also be considered income for purposes of making an IRA contribution.
Individuals can rely on the amount shown in the “Wages, tips, other compensation” box, reduced by the amount in the “Nonqualified plans” box, of their IRS Form W-2, Wage and Tax Statement, as eligible compensation, according to IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs). But non-W-2 income from services legitimately rendered qualifies too. When in doubt, IRA owners should consult with a competent tax advisor to determine if the income is eligible for an IRA contribution.
When filing federal income taxes jointly with a spouse, individuals who have little or no eligible compensation can make Traditional or Roth IRA contributions to their own IRAs based on their spouse’s income. All regular contribution rules apply and, in addition, to be eligible, an individual must be married, file jointly, and have enough eligible income to support any contributions by both parties.
No Age Restriction
Previously, individuals needed to be under age 70½ to contribute to a Traditional IRA. The SECURE Act repealed the age restriction for Traditional IRA contribution eligibility. Effective for 2020 and later taxable years, individuals with earned income can make Traditional IRA contributions at any age, not just for years before reaching age 70½. Note that an individual who turned age 70½ or older in 2019 cannot make prior-year contributions for 2019, even though the contribution deadline is April 15, 2020.
Without an age restriction on Traditional IRA contributions, more individuals who have earned income—including those who are already taking required minimum distributions—can still contribute.
Contribution Limits
The IRS restricts the amount that IRA owners can contribute to IRAs in any given year, subject to cost-of-living adjustments. For 2019 and for 2020, eligible individuals can contribute up to $6,000, plus a $1,000 catch-up contribution if they turn age 50 or older in the year for which the contribution is made.
The amount that can be contributed to a Traditional IRA depends on the amount of eligible compensation an individual has. Contributions must be supported with earned income. If an IRA owner only makes $3,000 per year and is not a married joint tax return filer, then the maximum amount she can contribute is $3,000.
As noted above under “Earned Income,” IRA owners who are married, filing jointly may use their spouse’s income to support a contribution. For example, Jim and Jane are 73 years old, married, and filing jointly. Jane no longer works, but Jim works part time as a driver for a dealership. Jim’s earned income for 2019 is $13,000. Jim and Jane can both make contributions to an IRA based on Jim’s income. Although their combined statutory limit is $14,000 ($6,000 plus $1,000 catch-up contribution limit each), their combined total contribution amount cannot exceed $13,000.
Deductions and Exclusions
Many choose to contribute to a Traditional IRA to receive a federal income tax deduction. Whether they qualify for a deduction depends on their retirement plan participation status and the amount of their income. Be careful not to confuse Traditional IRA contribution eligibility with deduction eligibility. Your clients may tend to think of them as one in the same, but it’s important to point out the key differences. Individuals may believe that if they are ineligible to take a deduction, then they cannot make a contribution to a Traditional IRA. Deductions do not determine contribution eligibility.
Beginning at age 70½, IRA owners and beneficiaries may exclude up to $100,000 from their taxable income by taking a qualified charitable distribution (QCD) that is payable directly to a qualified charitable organization. The income exclusion for a QCD is capped at $100,000. An IRA owner’s QCD may be applied toward an IRA owner’s required minimum distribution.
While IRA owners age 70½ and older with eligible compensation are now allowed to make regular contributions to Traditional IRAs, taking deductions for these post-70½ contributions may reduce the amount that they can exclude from income when taking a QCD.
