Understanding Rules Around IRA Contributions

With tax time approaching quickly, many American investors are asking questions about their individual retirement accounts (IRAs).

One big question: “If I didn’t turn 70 1/2 until early 2020, can I still make deposits into my traditional IRA?”

The answer is yes. Because you didn’t reach age 70 1/2 in 2019, you are eligible to make a contribution for the 2019 tax year (which is the year before the year in which you turn 70 1/2).

The maximum contribution is $6,000, and because you are older than 50, you qualify for a catch-up contribution of $1,000, meaning your total 2019 contribution can be up to $7,000.

There are some rules to follow, however. You may not contribute more than 100% of your earned income (or salary from work, but not dividend interest from your investments). So, if your earned income for 2019 will be less than $7,000, you may not contribute the full amount.

Another question: “When can I start taking distributions from my IRA?”

Anyone may begin taking distributions from an IRA without penalty at age 59 1/2. But you must begin taking required minimum distributions (RMDs) by April 1 of the year following the year in which you turn 70 1/2 (April 1, 2021, in the case of the questioner above). RMDs are determined by dividing the total balance of all your IRAs as of December 31 of the prior year by your life expectancy, as listed by IRS Publication 590.

Sound complicated? It can be. That is why it is helpful to have a financial advisor guiding you. Please reach out to us for assistance with your IRA contributions or withdrawals.