If you are receiving required minimum distributions from an IRA, you may have an opportunity to lower your tax burden for 2020! The Coronavirus Aid, Relief and Economic Security (CARES) Act includes a waiver for required minimum distributions for 2020. This provides immediate relief to taxpayers who were being forced to pay tax on the distribution but had no economic need. Another reasoning for this provision of the Act was to allow investors to retain their investments within their IRAs during a time our economy was contracting. Further, the required minimum distribution is based on the balance of the account at December 31, 2019. The markets were much higher than they are currently. The waiver applies to traditional and Roth inherited IRAs, too.
To provide immediate tax reduction, individuals under the age of 59½, who need funds to continue their lifestyle, may receive up to $100,000 of IRA premature distributions in 2020 and the 10% penalty for early distribution will be waived. However, the distribution is taxable. Good news for these individuals is that the tax due on the distributions may be evenly spread over three (3) tax years to be repaid.
If you are in the process of preparing and filing your 2019 individual income tax returns, you may contribute to your 2019 IRA up to July 15, 2020. This contribution would normally be allowed only to the date of April 15. By providing taxpayers the opportunity to build additional cash flow for their households, the extension of time to fund an IRA may allow investors to open or fund an IRA that otherwise would not be feasible.
Limits for IRA contributions for 2019 remain at $6,000 for Roth and Traditional IRAs. For those age 50 or older, an additional “catch-up” contribution of $1,000 is allowed. If you or your spouse, as married filing joint tax filers, wish to contribute to an IRA for 2019, your modified adjusted gross income must be $103,000 or less. If you are a single filer, your modified adjusted gross income must be $63,000 or less to contribute the full amount allowed in a Traditional or Roth IRA. The limit for IRA contributions for the 2020 tax year are the same as those in 2019.
Earnings limits for contributions to an IRA, while participating in an employer plan, are increased to $65,000 for single filers and $104,000 for married filing joint filers. The preceding amounts of modified adjusted gross income allow the taxpayer(s) to fully deduct their IRA contributions.
Lastly, one of the better changes to the IRA rules, for 2020, is the allowance of contributions to an IRA by individuals older than 70½. There is no age limit to make contributions to a Traditional or Roth IRA in 2020. This is a big bonus for many individuals who are savers. A tax deduction that you get to keep in your own account!?!? Welcome to the crazy world of taxation in the United States. See you on the golf course!