Here are the 2019 and 2020 rules and contribution limits to help you get the most out of your IRA:

Who qualifies?

You can contribute to an IRA if you (or your spouse, if filing jointly) have “taxable compensation,” also known as “earned income.” The following table shows what types of income would be considered “taxable compensation” and which types would not.

Compensation for Purposes of an IRA

* Alimony and separate maintenance do not count as earned income for divorces as of 1/1/2019 or before that but if modified after 1/1/2019.

How much can I contribute?

For the 2019 and 2020 tax years, you can contribute the lesser of $6,000 (or $7,000 if you’re age 50 or older by the end of the year) or your taxable compensation for the year.  This is the maximum amount you can contribute across all your traditional and Roth IRAs. Note that Roth contributions may be limited if your earnings exceed certain limits. See below for details.

Can my spouse contribute?

Even if your spouse doesn’t work, he or she can contribute to an IRA if you’re a wage-earner. But there are limitations.

Again, you can’t contribute more than you make in taxable compensation. But if you make over $12,000 (or $14,000 if you both are 50 or over), you may be able to contribute the full amount for each of you to a traditional IRA. In other words, for those under 50, that would come to $6,000 per spouse for a total of $12,000 for 2019 and 2020.

However, keep in mind that you can’t contribute the maximum to a traditional IRA and still contribute to a Roth IRA. If you and your spouse contribute the maximum of $12,000 (or $14,000 if you both are age 50 or over) to traditional IRAs, you would not be able to contribute to a Roth IRA during the same tax year.

When should I make contributions? 

Contributions can be made to your IRAs at any time during the calendar year and as late as the due date for filing your tax return (which is usually on or around April 15 of the following year). (See: Contributing Earlier to Your IRA Can Make a Big Difference Over Time)

That means that even if you haven’t yet made an IRA contribution, you have until the April tax filing deadline to still make the contribution for this year. That could reduce your taxes on your previous year’s returns.

Are there age restrictions?

You must stop contributing to a traditional IRA during the year that you turn 70 ½. 

However, you may still be able to contribute to a Roth IRA, which carries no age restrictions. Although you would not benefit from current year income tax savings, a Roth IRA would offer both tax-free growth of principle and, when qualified, the tax-free withdrawal of your funds. 

Are there upper income restrictions?

There are no upper income limitations on contributing to a traditional IRA, although there are income restrictions for taking a deduction for your IRA contribution when contributing to both an IRA and a 401(k) plan at work.

But there are income restrictions for contributing to a Roth IRA. The following table lays out the income limits for your eligibility for contributing to a Roth IRA.

What if you have a 401k plan at work?

If you already have a 401k plan at work, or are covered by another type of retirement plan (such as a pension, profit-sharing or SEP plan), your ability to benefit from a tax deduction due to your traditional IRA contribution would depend on your taxable income and filing status.

If you earn above these income restrictions and you still want to contribute to an IRA, opening a Roth may be a better option than a traditional IRA if you meet the Roth income limits. Although a Roth IRA wouldn’t provide a tax benefit for the current year, it would grow tax-deferred, and you would have the benefit of tax-free qualified withdrawals later, whereas traditional IRA withdrawals are taxed.  

What are the penalties for early withdrawal?

All contributions and earnings you withdraw from your traditional IRA are taxable. If you are under age 59 ½ you may also have to pay a 10% tax for early withdrawals, unless you qualify for an exception.

(See: Contribution and Deduction Limits & Rules for IRA and CESA)

Take advantage of tax contribution limits and Open a Thrivent Funds IRA today.