By Sarah Brenner, JD
Director of Retirement Education

The IRS has delayed the deadline for filing federal income taxes until May 17, 2021. This also extends the deadline for making a 2020 Roth IRA contribution. A Roth IRA offers the promise of tax-free withdrawals in retirement if you follow the rules. If you are deciding whether a 2020 Roth IRA contribution is the right move for you, here are some things to keep in mind.

Contribution Limits

If you were under age 50 in 2020, the maximum contribution that you may make to a Roth IRA for 2020 is $6,000. For those who reached age 50 in 2020, the maximum contribution limit is $7,000. The annual limit is aggregated for traditional and Roth IRAs. For example, you could contribute $4,000 to your Roth IRA and $2,000 to your traditional IRA. But you may not contribute $6,000 to your traditional IRA and $6,000 to your Roth IRA for 2020.

You or your spouse must have taxable compensation or earned income to make a Roth IRA contribution. Passive income such as investment income will not work. Social Security income will not work either.

You are never too old to contribute to a Roth IRA. You may make Roth IRA contributions at any age if you are otherwise eligible.

Do you already contribute to a retirement plan at work? That is not a problem. Your participation in your company plan does not affect your eligibility to make a Roth IRA contribution.

May 17, 2021 Deadline

The deadline for contributing to a Roth IRA for 2020 is May 17, 2021. If you have an extension to file your taxes, that does not give you more time. Sooner is better than later. Don’t wait until the last minute. You never know what may happen.

Be sure to let the IRA custodian know the year for which you are contributing. To avoid confusion, be sure you designate your contribution as a 2020 prior year contribution. Interesting fact – You don’t have to tell the IRS about your Roth IRA contribution. There is no requirement that you report a Roth IRA contribution on your 2020 federal tax return. It is good practice, however, for you or your tax preparer to keep track of your Roth IRA contributions.

Backdoor Roth IRA Contributions

Your income must be under certain limits to make a Roth IRA contribution. When your modified adjusted gross income (MAGI) exceeds $124,000, if you are single, or $196,000, if you are married filing jointly, your ability to contribute to a Roth IRA for 2020 begins to be phased out.

If your income is too high, you might consider a back-door Roth IRA. You simply contribute to a traditional IRA, which has no income limits, and convert. Sounds intriguing? Check with a knowledgeable tax or financial advisor to see if this is a good strategy for you. If you have pre-tax funds in any IRA, the pro-rata rule will apply to your Roth conversion.