Opening an IRA for 2020 tax credit

[Telecorder]

Am doing 2020 taxes in TT and software indicates we can get a credit if we contribute to wife's IRA. Have tried to wade through tax code but am confused. Am concerned Turbo Tax 2020 isn't addressing circumstances.

• Can she open an IRA before 4/15/21 and fund max of $7K for credit for year 2020
• She turned 70.5 on 12/23/19
• She's retired, no earned income, receives SSA; I have a 401K through my employment
• Is she still subject to the Required Minimum Distribution for this new IRA 

[RayW7 · Accepted solution]

Yes, she can fund up to $7,000 subject to limitations. Everyone is eligible to make contributions to a traditional IRA, but a tax deduction for those contributions may not always be available. You may need to reduce or entirely eliminate your IRA  deduction if you or your spouse

• contributes to an employer-sponsored retirement plan, such as a 401(k) or 403(b), and
• your Modified Adjusted Gross Income (MAGI) exceeds annual limits.
• you must have earned income or you can contribute to your traditional IRA past age 70½ as long as one spouse has eligible compensation, that spouse can make IRA contributions for an IRA for the nonworking spouse. 

For a Traditional IRA, for 2020 full deductibility of a contribution is available to active participants whose 2020 Modified Adjusted Gross Income (MAGI) is $104,000 or less (joint) and $65,000 or less (single); partial deductibility for MAGI up to $124,000 (joint) and $75,000 (single).  Social Security benefits received by a tax filer and his or her spouse filing jointly are counted when determining a household's MAGI. For people who have other income, some Social Security benefits may be included in their AGI.

Under the SECURE Act, you can contribute to a traditional IRA after age 70½. Required Minimum Distributions still apply to traditional IRAs at 70½ or 72 depending on your birthday. If you have earned income in retirement, Roth IRAs can be a great way to save

Yes, she will be subject to RMD's for the new IRA.  your required minimum distribution is the minimum amount you must withdraw from your account each year. You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account when you reach age 72 (70 ½ if you reach 70 ½ before January 1, 2020).

I understand this is a lot to deal with.  TurboTax will guide you through all of these conditions and offer a suggestion regarding the allowed contribution towards the end of you interview. 

-follow these links for more information-

Retirement Plans FAQs regarding Required Minimum ...

IRS: Retirement Topics – IRA Contribution Limits - Internal ...

[edited 3/12/2021\12:24pst]

[Telecorder]

Thanks for the prompt response. I take it then that Turbo Tax is adjusting the credit based on our joint 2020 AGI being in the phase out range 104K-124K [eg partial deductible credit].

Would the difference between the allowed partial credit and the full funded amount of $7K be considered/need to be indicated as a nondeductible contribution [Form 8606]?

[SteamTrain]

@RayW7   Don't you have to have earned income to make a contribution ?   I hadn't seen that the SECURE act had eliminated that requirement...but maybe I missed it.

I didn't see anything in @Telecorder  's post that indicates that either spouse  had any earned income in 2020 at all..

[Telecorder]

My understanding is that me [spouse] being still employed, having salary income and a 401K in my name qualifies for her to 'use' my income as a basis since we're filing joint...

Kay Bailey Hutchison Spousal IRA.

 In the case of a married couple with unequal compensation who file a joint return, the deduction for contributions to the traditional IRA of the spouse with less compensation is limited to the lesser of:

1. $6,000 ($7,000 if the spouse with the lower compensation is age 50 or older), or

2. The total compensation includible in the gross income of both spouses for the year reduced by the following three amounts.

   1. The IRA deduction for the year of the spouse with the greater compensation.

   2. Any designated nondeductible contribution for the year made on behalf of the spouse with the greater compensation.

   3. Any contributions for the year to a Roth IRA on behalf of the spouse with the greater compensation.

This limit is reduced by any contributions to a section 501(c)(18) plan on behalf of the spouse with the lesser compensation.

[SteamTrain]

Ahhh...clearer now...when you said you had a 401k, I thought you meant you were now getting some of your retirement income from the 401k as a result of your former employment...not that you were still employed.

[Telecorder]

Curious on funding her new IRA with after tax funds from savings; (thus question on non deductible portion previously);

would the portions of the future earnings from this after tax be subject to taxes or capital gains when withdrawn 

[Telecorder]

Additionally - since the new IRA would be funded by 4/15/ 2021 but indicated to be for 2020 tax year, would she be required to then take two MRDs in 2021 for both the MRD for 2020 and another MRD for 2021 by 12/31/2021?

I'm finalizing our 2020 1040-SR Turbo Tax and concerned about the need for reflecting any portion of the $7K initial funding of her new IRA without reflecting any portion of the $7K as a nondeductible contribution. Turbo Tax states this aspect is not recommended but I'm unclear as to the reason why.

[SteamTrain]

Sorry, I'm not "up" on the aspects of the 2021 RMD, when you contribute late to the 2020 IRA. 

 @dmertz 

might be able to help with that.

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The reason you may not want to contribute to the IRA as part deductible and part as nondeductible, is that the nondeductible part has to be carefully monitored and taken out proportionally (Across ALL traditional IRAs in the wife's name) whenever the RMDS are taken...and that can get messy to keep track of.

Contributing to a ROTH IRA may not be deductible, but both earnings and contributions are not taxed, as long as any  ROTH IRA in her name has been in existence for at least 5 years.  AND no RMD is required either.

[Mark73739]

Yes.

I am retired but my wife is still working. We both have a 401K through our employer and qualify to contribute $14,000.00 for both of us. How do we do it?

[SteamTrain]

@Mark73739 

IF you have a 401k at the employer, you cannot add anything to it for 2020 taxes.....those contributions had to be done by 31 Dec of 2020.

___________________

IF you want to make a separate IRA contribution to an outside IRA account for one, or both of you.....the fact that you do have a 401k plan at the employer...if you made any contributions there in 2020....that does limit your ability to contribute to a deductible IRA for 2020 now....and it may be too late anyhow.....while the deadline is 17 May, a contribution today might/might not get recorded until the 18th..or later and thus be disallowed.  (you should be making your decisions days/weeks sooner).

IF you actually can get it recorded as a deductible IRA contribution today....or before Monday....the LIMITS on being able to actually do that are based on your combined AGI.   The links to the tables showing the income limits for contributing to a deductible IRA for 2020 taxes, are shown here:

https://www.irs.gov/retirement-plans/ira-deduction-limits