Most tax planning strategies, such as tax gain/loss harvesting, annual gifting, and charitable giving, have a year-end deadline of December 31st. However, some opportunities still apply to the prior tax year even as the new one begins. That said, a recent update has eliminated one such option—taxpayers can no longer use their income tax refund to purchase savings bonds. IRA, Roth IRA, and HSA contributions remain some of the key tax-planning opportunities with a tax-filing deadline (on or around April 15th), instead of December 31st. At Luminvest Wealth Management we advise most eligible clients to contribute to an IRA or Roth IRA every year.
A key element of eligibility to contribute to an IRA or Roth IRA is earned income. This includes wages, salaries, self-employment, and other types of earned income, but not passive income from investments, Social Security benefits, and other income. Those who don’t have any earned income themselves but file married filing jointly with a spouse that does, may contribute the lesser of the IRA contribution limit or their spouse’s earned income less their IRA (or Roth IRA) contribution. Roth IRA eligibility depends on both having earned income and not too much Modified Adjusted Gross Income (MAGI). The IRS Roth IRA income limitations for tax year 2024 maximum contribution are $230,000 for married filing jointly and $146,000 for single tax filers.
There is no age limit on IRA contributions. Retirees withdrawing from their investment portfolio for their living expenses may still want to contribute to an IRA or Roth IRA if they have any earned income. Parents and grandparents can also help children get a head start on learning about and investing in their future by opening a Roth IRA account for the younger generation. The child will need to meet the same requirements as adults, but the cash contributed is considered fungible and does not need to be directly traced to the money earned from working.
When deciding whether to contribute to an IRA or Roth IRA it’s advisable to consider one’s tax bracket for the tax year of the contribution, as well as expectations about future income and tax rates. When in doubt, a Roth IRA contribution is often a safe bet. One advantage of Roth contributions is that they can be withdrawn penalty-free any time. Earnings, on the other hand, may be subject to income tax and a 10% penalty unless certain criteria are met.
Many Luminvest have high income that precludes them from contributing to a Roth IRA, while often also having too much income get a tax deduction on a Traditional IRA contribution. In this situation, it frequently still makes sense to make a Traditional IRA contribution. Such non-deductible contributions create basis in the IRA which will not be taxed when later distributed. The IRS rules require that IRA distributions constitute a pro rata portion of the deductible and non-deductible IRA balances across all IRAs owned by the taxpayer. Many taxpayers can increase the percentage of the distribution that is tax-free (basis) by transferring a rollover IRA to a 401k. Otherwise, making a non-deductible IRA contribution may be of little benefit, or even detrimental where the earnings on the contribution are taxed at ordinary income tax rates instead of capital gain income tax rates had the funds been invested in a non-IRA account.
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