TurboTax (and various websites) are telling me I can reduce my taxes owed by contributing to my IRA. But money for both a traditional and Roth IRA are already deducted from my paycheck every two weeks, and I’m fairly sure that my W-2 lists both.
Is TurboTax talking about these contributions, or a separate one I can make on my own? Do I just take the info from my W2 or my investment website for how much was deducted from my paycheck between last April and now and put it in? Or do I put in $0 for that, because it’s already counting everything on my W2?
It sounds like you may be confusing a 401k (employer-sponsored retirement plan) with an IRA (individual retirement account). Note that both a 401k and an IRA can come in either traditional (pre-tax) and Roth (post-tax) options.
If you have contributions going to an employer-sponsored traditional 401k through payroll, you are correct that they are already reflected in your W-2 and you do not need to separately include them in your taxes. Contributions going to a Roth 401k do not impact your taxes and do not need to be reported.
You can set up a personal IRA, either traditional or Roth, at a brokerage like Vanguard or Fidelity. There are limits on the amount that you can contribute, and income limits that restrict who is allowed to make contributions. If you make contributions to a traditional IRA, they should be reported on your taxes and will reduce your total income. Contributions to a Roth IRA do not impact your taxes, but need to be reported so that the IRS can confirm that you are meeting the appropriate limits.
Typically you have until tax filing day (Apr. 15) to contribute to an IRA for the previous year. Because of COVID-19, that deadline has been extended to July 15, 2020 for 2019 contributions.
This year only, you have until July 15 to contribute to a 2019 IRA. You can file your tax return and claim the contribution even before you make it. But if, for some reason, you don’t get the contribution made on time you’d have to file an amended return, which is a pain. The one thing to look out for is make sure you explicitly inform the IRA custodian that this is for 2019 (NOT 2020) and make sure they properly record the year.
And remember that there are two types of IRA: Traditional and Roth. You don’t get a deduction for contributing to a Roth, but you also don’t have to pay taxes when taking money out when you get older.
Contributions to a Roth IRA are not reported anywhere on your tax return except Form 8880 which is used by certain low-income taxpayers to claim the Saver’s Credit.
If you have a retirement plan through work, it is most likely a 401(k). It may also be a 403(b) for certain types of employers that cannot be allowed to use the profit-sharing option of a 401(k) plan because they do not have profit motives (public schools, nonprofits). If you work for a very small employer, you may have a SIMPLE IRA (which I do) that allows you to forgo a lot of the complication of a 401(k) plan in return for lower contribution limits (and the side effect of the employer not being the trustee of the money, but the individual’s own choice like with any other IRA). Small employers may also offer a SEP IRA, but those are practically only designed for the benefit of the owner, and he has to contribute for his employees if he has some, so it’s mainly for self-employed people.
Everyone is allowed to contribute up to $6,000 a year (was $5,500 in 2018, presumably will go up to $6,500 in a few years) to some sort of IRA beyond whatever plan their employer has, and it’s theoretically possible for the employer to have no separate retirement plan but put in a mechanism that allows you to contribute to an IRA through paycheck deductions, though I’ve never heard of such a system actually being in use. There are income limits for Roth contributions, and similar income limits for deducting contributions to a traditional IRA if you have a retirement plan through an employer. Nondeductible traditional IRA contributions create “basis” in the IRA, which will reduce the amount of taxable distributions from the IRA, but any earnings will end up being taxed and the basis will be taken out pro rata each year based on the size of the balance, the amount withdrawn, and the remaining basis. This last situation is in contrast to a Roth IRA where earnings are never taxed and you can always withdraw your contributions tax-free before getting taxed on any earnings, even if you’re not 59.5 years old yet. Roth IRAs are a much better deal than nondeductible traditional IRAs, but the latter are certainly better than leaving it in a taxable account.
If you have no traditional IRAs and make a nondeductible traditional IRA contribution because your income is too high, you can roll the money over immediately into a Roth IRA and it’s basically the same thing as making a Roth contribution. This is called a 'back-door" Roth. It only works if you have no other traditional IRAs. Well, it only works well when you do. There’s one client of ours that makes nondeductible contributions to his traditional IRA and then rolls the same amount into his Roth, but he has other IRAs, so not all of his basis gets used each time, and some of the rollover amount is taxable despite him not getting a deduction for the contribution. His basis keeps going up so he’ll be able to get more of his other IRA out tax free eventually, and what he’s doing it probably better than nothing at all, but it’s weird given his income level that he doesn’t just roll over more than the contribution amount into the Roth and just pay a larger tax bill just to get that situation back to something more reasonable.
Actually only people who have “compensation income” (it used to be “taxable compensation income” before they added nontaxable combat pay) in an amount at least equal to their contribution. Plus married people can do a spousal IRA if their spouse has compensation income. I point this out because I see a lot of laments from people who say “I got some money from a [gift, inheritance, investment, grant, foreign excluded income] and put it into an IRA and nobody told me you had to have a job. What do I do now?”
Earnings can be taxed if you take a non-qualified distribution and have exhausted all your basis or you take a return-of-contribution distribution.
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There are two aspects to the income limit:
If your income is above a certain amount, you are not eligible to make Roth contributions but you can make contributions to a regular IRA. You can actually get around that limit by immediately recharacterizing the traditional IRA to a Roth IRA. There would be tax implications on any income in the meantime.
As I understand it, you can make a regular IRA contribution regardless of your income level. However, your contributions can only be made pretax if your income is under a certain amount. Either way, the income grows pretax.
Okay, but Publication 590, now 590A and 590B, uses Arrangement. It seems to be all Accounts are Arrangements but not all Arrangements are Accounts. There are also Annuities.
No, do not “recharacterize” – “convert.” I am not just quibbling about language, these are two separate things. Recharacterizing will not get around the income limit on Roth IRA contributions, converting will.
Correct.
BUT…
There is a third limit. You must have a minimum amount of income to make either a Roth or Traditional contribution. You must have “compensation income” of at least an amount equal to what you are contributing. For most people “compensation income” is taxable earned income, but there are a few other types of income that qualify.
I do admit that I was blinded by OP’s situation of having a job with a retirement plan when stating “everyone”. My response was meant to cover people in his situation, not the general public, though that’s not necessarily how it might be taken out of context, so i appreciate someone adding those corrections about earned income. It wasn’t until after I became a CPA (over a year after starting work) that I even found out that spouses could “borrow” the other’s earned income for contributions.
The code section linked is absolutely filled with “individual retirement account or individual retirement annuity”. For succinctness outside the actual law, the IRS Pubs treat them as the two types of “Arrangements”.