You’ve got more time to fully fund IRA

Long version

As you’ve probably heard, the government extended the federal income tax filing deadline for individual taxpayers from April 15 to May 17, due to the COVID-19 pandemic. But the extra month doesn’t just give you additional time to prepare your taxes – it also provides you with an extra chance to contribute to some tax-advantaged investments for the 2020 tax year.

First of all, you’ve got more time to fully fund your IRA – in fact, if you don’t already have one, you’ve got until the new tax deadline to open one for the 2020 tax year and then continue funding it for 2021 and beyond. For 2020 and 2021, the IRA contribution limit is $6,000, or $7,000 if you’re 50 or older.

If you have a traditional IRA, your investment dollars are typically tax deductible. So, for example, if you are in the 24% tax bracket, and you put in the full $6,000, your contribution for the 2020 tax year would only “cost” you $4,560, because you’d be able to deduct $1,440 from your taxable income. (Deductibility is gradually phased out at certain income levels.)

And your earnings grow tax-deferred until you start taking withdrawals, typically during retirement. With a Roth IRA, your contributions aren’t deductible, but earnings can grow tax free if you’ve had your account at least five years and don’t take withdrawals until you’re 59½ or older. Eligibility for a Roth IRA also phases out at higher income levels.

What if you own a small business or, like many people this past year, struck out on your own and became self-employed? Business owners who file as sole proprietors also have until May 17 to contribute to, or open, a SEP IRA. (You might qualify for an extension until Oct. 15.) An SEP IRA is similar to a traditional IRA in that contributions are tax deductible and earnings grow tax deferred. For the 2020 tax year, you can contribute the lesser of 25% of your compensation or $57,000. However, special rules govern the maximum deductible contributions, so consult with your tax advisor before finalizing the amount you put in. Also, keep in mind that your estimated taxes for the first quarter of 2021 will still be due on the original April 15 date.

There’s one more area in which the new tax-filing deadline offers you an opportunity: “recontributions” to your retirement plans, such as your IRA and 401(k). In 2020, withdrawal rules were loosened for these accounts for individuals financially affected by the pandemic, and if you took money out, you could spread the taxes over three years. However, during that time, you can recontribute all or part of the withdrawals. And any money you do recontribute before the tax filing deadline of May 17 (or later, if you get an extension) can be excluded on your 2020 tax return, possibly reducing your taxes. So, your recontribution can provide you with more money in your retirement accounts and a tax break today.

One final point: If you’ve already filed your taxes but would still like to claim the extra tax benefits provided by IRA contributions or retirement plan recontributions, you may be able to file an amended return, so check with your tax advisor. In any case, look for ways to benefit from the tax-advantaged opportunities available to you.

Number of words: 550

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

Edward Jones, its employees and financial advisors cannot provide tax advice. You should consult your qualified tax advisor regarding your situation.

Short/radio version

PSA: You’ve got more time to fully fund IRA  

TBA: April 7, 2021

Words: 187 (excluding FA’s name, address/phone number)

The federal income tax filing deadline has been extended for individual taxpayers from April 15 to May 17 – so you’ve got an extra month to contribute to some tax-advantaged investments for the 2020 tax year.

You can put up to $6,000 into your IRA, or $7,000 if you’re 50 or older. With a traditional IRA, your contributions are generally tax deductible. Roth IRA contributions are not deductible, but earnings can grow tax-free if you meet certain conditions.  

If you’re self-employed, or a small business owner who files as a sole proprietor, you’ve got an extra month to contribute to your SEP IRA. Consult your tax advisor to determine how much you can contribute and how much can be deducted from your taxes.

Also, if you withdrew funds from your IRA or 401(k) last year under the special rules enacted for COVID-19 and you “recontribute” some of the money before the new May 17 deadline, you can exclude this recontribution from your taxes. Any amount you don’t recontribute will generally be taxable over three years.  

The new deadline gives you some opportunities – try to take advantage of them.

This content was provided by Edward Jones for use by (FA's NAME), your Edward Jones financial advisor at (Branch address or phone #).

Edward Jones, its employees and financial advisors cannot provide tax or advice. You should consult your qualified tax advisor regarding your situation.

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