I want to fund a new Traditional IRA to lower my AGI for filling my 2021 taxes. Will contributions from my bank account that is already taxed still lower my AGI for 2021?

[acw380]

I would like to fund the account with the maximum, $6000, post tax from my bank account. Will this reduce my AGI by $6000 and give me a tax return on the taxes I already paid on the $6000?

[Critter-3]

Yes ... if you make a deductible IRA contribution that is how the process is set up to work.  The contribution is an adjustment to income thus lowering your tax bill. 

See these IRS IRA deduction limit charts.

If *you* are covered by a retirement plan:
https://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-i...

If you are *not* covered but your spouse is:
https://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-i...

[macuser_22]

As long as you are otherwise qualified to make a contribution.

The maximum IRA contributions for 2020 is $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 which ever is less.

(Taxable compensation is generally wages that you worked for - W-2 or net self-employed income minus the deductible part of the SE tax, but can include commissions, certain alimony and separate maintenance, and nontaxable combat pay ).

See IRS Pub 590A "What is compensation" for details:
https://www.irs.gov/publications/p590a#en_US_2020_publink1000230355

See this IRS link for Traditional IRA deduction limits when covered by a retirement plan at work.

https://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

[acw380]

Thanks for the replies. I am qualified to make contributions as I do not exceed the maximum income limit and have not made any IRA contributions for the year. Pre-tax pay check contributions to a TIRA makes sense but how will I be able to make sure I get the post tax contributions back correctly? If I get a refund on the taxes I paid how will the tax software know how much? Is there a separate form? The main reason I want to do the TIRA is for the AGI reduction. If for some reason I cant get it I should just go with a Roth and same some headache.

[VolvoGirl]

What is pre tax contributions to TIRA?  You can not make IRA contributions pretax out of your pay.   If you have paycheck pretax deductions those would be to a 401K or 457 or pension plan.   You only contribute to an IRA outside of work.  So it's all from post tax money.   

[SteamTrain]

@VolvoGirl 

Complications, always:

We are going to have to start being careful about indicating to folks that IRA contributions cannot come out of a person's paychecks, since so-called "Auto IRA" payroll deductions, have apparently started up in three states (OR, IL, CA) and perhaps more to come in the future.   Certainly, they would likely be "After-tax" contributions, and I have no idea how they would show up on a W-2....perhaps in box 14, or not at all, but in a separate statement so that the person could enter those values separately as an IRA contribution in the tax return.

_______________________

A Couple articles:

The Automatic IRA at 15: Helping Americans build retirement security (brookings.edu)

State-run 'auto IRAs' gaining steam as a retirement savings solution (cnbc.com)

[SteamTrain]

Looks like the ROTH IRA is the main default , with some being able to choose Trad. IRA as an option.

Four other states and the City of Seattle (georgetown.edu)

[VolvoGirl]

@SteamTrain   Right.  That's why I said you couldn't  make PRETAX contributions out of your paycheck.

[Critter-3]

The bonus to these payroll investments to IRA accounts is that the fees are usually low and you can put in small amounts per paycheck and year ... most banks/brokers don't want to deal with these "small" accounts that dribble in a few $$ periodically  since they cost more to administer than they bring in in fees.  Most will not look at you unless you have $5K or more to start with.  

[acw380]

This was what prompted my original question. The account I want to start has a $5000 minimum so I would have to use my post-tax dollars in my bank account to fund it. I might be misunderstanding how people fund TIRAs. If a TIRA requires pre-tax contributions how would you be able to fund it unless the money is taking out of your pay check directly, before tax is applied? Again I am trying to take advantage of the AGI reduction of $6000 from my contributions to the account for the year (the max contribution limit).

"A traditional IRA is a type of individual retirement account in which individuals can make pre-tax contributions and the investments in the account grow tax-deferred. In retirement, the owner pays income tax on withdrawals from a traditional IRA."

[VolvoGirl]

It doesn't come out of your pay pretax.  But when you file your tax return it can be a deduction before the AGI which makes it pretax.  See 1040 schedule 1 line 19 which goes to 1040 line 10a.

https://www.irs.gov/pub/irs-pdf/f1040s1.pdf 

[macuser_22]

Whether the money itself from the employer is pretax or after tax money is irrelevant when put into a Traditional IRA.     What determines the IRA contribution status is how *you* report it on your tax return.   A contribution, reguardless where the money came from, can either be reported as a tax deduction (pre-tax) on the 1040 so that it is not taxed, or as a non-deductible contribution (after-tax) on a 8606 form for that tax year.

Your AGI will only be lowered if you deduct the contribution.

[acw380]

Thanks, that makes sense

[Opus 17]

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@SteamTrain wrote:

@VolvoGirl 

Complications, always:

We are going to have to start being careful about indicating to folks that IRA contributions cannot come out of a person's paychecks, since so-called "Auto IRA" payroll deductions, have apparently started up in three states (OR, IL, CA) and perhaps more to come in the future.   Certainly, they would likely be "After-tax" contributions, and I have no idea how they would show up on a W-2....perhaps in box 14, or not at all, but in a separate statement so that the person could enter those values separately as an IRA contribution in the tax return.

Even without an "automatic IRA", most employers who offer direct deposit will allow employees to split their paycheck between 2 bank accounts.  In the "old days" the second account could be a savings account.  But there's no reason the second account couldn't be an IRA that the person sets up at a bank or broker, as long as it has an ACH-compatible account and routing number.  This would of course be after tax.

But it's always going to be important to clarify with taxpayers the difference between qualified workplace plans and individual (private, after-tax) accounts. 

[Opus 17]

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@acw380 wrote:

This was what prompted my original question. The account I want to start has a $5000 minimum so I would have to use my post-tax dollars in my bank account to fund it. I might be misunderstanding how people fund TIRAs. If a TIRA requires pre-tax contributions how would you be able to fund it unless the money is taking out of your pay check directly, before tax is applied? Again I am trying to take advantage of the AGI reduction of $6000 from my contributions to the account for the year (the max contribution limit).

"A traditional IRA is a type of individual retirement account in which individuals can make pre-tax contributions and the investments in the account grow tax-deferred. In retirement, the owner pays income tax on withdrawals from a traditional IRA."

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The only time you can make truly pre-tax contributions via payroll deduction is to a qualified workplace plan like a 401k, 403b, or similar.  

With any private or individual plan, the money comes from your after-tax dollars.  You then can take a tax deduction on your tax return, if you meet income and other requirements.  The tax deduction gives the same net result at the end of the year, but if the money is coming out of your paycheck, it is an after-tax deduction and not a pre-tax deduction.