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15 IRA Rules You Should Know

Get familiar with 15 key IRA rules, including what’s new for 2020 related to coronavirus-related hardships. You’ll feel confident about using this retirement account no matter if you’re employed, self-employed, or unemployed.

By
Laura Adams, MBA
5-minute read
Episode #641
saving for IRA

Since the coronavirus pandemic has caused so much economic uncertainty this year, it’s the perfect time to get serious about funding your retirement. There are a variety of accounts you can use, but an IRA or Individual Retirement Account is one of the best options.

I’m a fan of using retirement accounts because they come with tax advantages that make your money go further. The downside is that you must follow strict rules to qualify for the tax benefits, which can seem confusing at first.

If you’ve been shying away from using an IRA, this post covers everything you need to know, including what’s new in 2020 related to the coronavirus. We’ll review 15 IRA rules so you can use an IRA confidently, no matter if you’re employed, self-employed, or unemployed.

1. You must have earned income to contribute to an IRA

The only qualification for using an IRA in a given year is that you have earned income. It can be any kind of taxable compensation, such as a salary, wages, tips, bonuses, commissions, or self-employment income.

Here are the IRA rules 2020: You can contribute an amount equal to your taxable compensation up to $6,000 or up to $7,000 if you’re age 50 or older.

2. Your contributions to a traditional IRA are tax-deductible

In general, you don’t pay tax on contributions to a traditional IRA until you withdraw them. Both your contributions and account earnings grow tax-deferred until you take distributions in retirement.

This year, the SECURE Act changed the age when you must begin taking required minimum distributions (RMDs) from 70½ to 72.

This year, the SECURE Act changed the age when you must begin taking required minimum distributions (RMDs) from 70½ to 72. RMDs dictate a schedule for withdrawing money from a retirement account paying tax on it.

Another significant change is that you can make contributions to a traditional IRA for as long as you have earned income. Previously, you couldn’t contribute past age 70½. Now, you have more time to grow your nest egg if you’re still working into your 70s.

3. Your contributions to a Roth IRA are not tax-deductible

Tax on a Roth IRA works the opposite of a traditional IRA because you must pay tax upfront on your Roth contributions. However, your contributions and account earnings are completely tax-free when you make withdrawals in retirement. This valuable benefit can save you a massive amount of taxes.

Your contributions and account earnings are completely tax-free when you make withdrawals in retirement.

Like with a traditional IRA, you can make contributions at any age, as long as you have earned income. But there are no required distributions—you can keep money in a Roth IRA as long as you like.

4. You can’t contribute to a Roth IRA if your income exceeds a limit

Since the benefits of a Roth IRA are so good, those with high incomes get excluded. Your contributions get reduced or eliminated when your income reaches certain limits.

For single taxpayers, you qualify for a reduced contribution when your modified adjusted gross income (MAGI) is between $124,000 and $139,000. You can’t make a Roth IRA contribution when it is $139,000 or higher.

For taxpayers who file jointly, you qualify for a reduced contribution when your MAGI is between $196,000 and $206,000. You can’t contribute when it’s $206,000 or higher.

5. Your Roth IRA can sit idle

If you contributed to a Roth IRA in the past but now make too much money to qualify, don’t worry, you can keep it. You can manage it and allow it to grow, but you can’t make any new contributions.

If your income falls below the Roth IRA cutoff in the future, you can make contributions to the same account again.

6. Minors can also have an IRA

As I mentioned, all you need to qualify for an IRA is some amount of earned income. That means a minor can start saving for retirement as soon as they get their first job, such as a part-time weekend gig or full-time summer work.

A minor can start saving for retirement as soon as they get their first job.

A young person can contribute as much as they earn, up to the maximum limit of $6,000 for 2020.

7. Spouses with no earned income can have an IRA

There’s one exception to the earned income rule, which is that a non-working spouse qualifies for an IRA. This benefit helps an unemployed or stay-at-home spouse save for retirement.


If you’re married and have a working spouse, both of you can max out an IRA. For example, if both spouses are under age 50, and you have household earnings of at least $12,000, both spouses can contribute up to $6,000 in each of their IRAs.

8. You can’t own an IRA jointly

A retirement account can only be owned by an individual, even if you’re married. There’s no such thing as a jointly owned IRA.



9. You can’t fund someone else’s IRA

Each retirement account owner must qualify to make contributions based on their income. However, a minor’s parents can make contributions on their behalf, up to the allowable limits.

10. You can withdraw Roth IRA contributions penalty-free

In general, distributions from a retirement account before you reach age 59½ are subject to taxes and an additional 10% early withdrawal penalty. However, since you pay tax upfront on Roth IRA contributions, you can withdraw the contribution portion of your account at any time, tax- and penalty-free.

But withdrawals of Roth IRA earnings before age 59½ and before the account is five years old, would be subject to tax and the 10% penalty—with some exceptions.

You may qualify to avoid tax and a penalty (when you satisfy the five-year waiting period) if you spend a withdrawal on:

  • A first-time home purchase, up to a $10,000 lifetime maximum
  • Education expenses
  • A birth or adoption
  • Unreimbursed medical expenses
  • Health insurance premiums (if you’re unemployed)
  • Distributions made over time in substantially equal periodic payments

11. You don’t have to make an IRA contribution

It’s up to you whether you want to contribute to an IRA in any given year. If you don’t make contributions, your account stays open indefinitely.



12. You can contribute to more than one type of IRA

You can open up and contribute to as many traditional and Roth IRAs as you like. However, your total contributions to all of them can’t exceed your annual allowable limit (which is $6,000 for most people under 50).

For example, you could contribute $1,000 to a Roth IRA and $5,000 to a traditional IRA, or $3,000 to each per year.



13. You can contribute to an IRA and a retirement account at work

You can max out a retirement plan at work, such as a 401(k), and max out an IRA in the same year. However, when you (or a spouse) have a workplace account, your tax deduction for traditional IRA contributions may be reduced or eliminated, depending on your income.

14. Your IRA investment losses are not tax-deductible

In a taxable brokerage account, your investment losses can be used to offset your investment gains each year. However, that’s not allowed for losses in retirement accounts.

15. You have additional time to make IRA contributions

You have until April 15 following the tax year to make contributions to a traditional or a Roth IRA. For example, if you want to fund your IRA for 2020, you have until April 15, 2021.

New coronavirus IRA rules for 2020

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which became law at the end of March 2020, expands how you can use certain types of retirement accounts through the end of the year.

 

From January 1 to December 30, 2020, you can distribute up to an aggregate limit of $100,000 from any retirement plan or IRA, if you have a coronavirus-related financial hardship. According to the IRS, the early withdrawal penalty does not apply to any coronavirus-related distribution.

However, you must pay tax on any withdrawals that weren’t previous taxes. You can pay all your tax for 2020 or spread it out over three years, from 2020 to 2022.

About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a trusted and frequent source for the national media. Her book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show. 

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