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Friday April 17, 2020

The Cares Act and Your IRA: Don’t Overlook The Opportunities

As a result of the recently enacted CARES Act, there are ways investors can benefit from these temporary relief measures. Below we outline a few opportunities which you may wish to consider and discuss with your financial advisor and tax professional.

There’s still time to make 2019 IRA contributions.

Because the due date for filing federal income tax returns has been postponed to July 15, 2020, the deadline for making contributions to an IRA for 2019 is also extended to July 15, 2020. This means you can still contribute to a traditional IRA, Roth IRA, and Education Savings Account (ESA) for 2019 if you haven’t already.

How much can you contribute to a traditional or Roth IRA?

For the tax years 2019 and 2020, contribution limits have increased. Total contributions to all your traditional and Roth IRAs cannot be more than:

  • $6,000 ($7,000 for those age 50 or older), or
  • Your taxable compensation for the year, if your compensation was less than the maximum contribution limit.

Note that contribution limits may be less than the maximum amounts if you or your spouse is covered by an employer-sponsored retirement plan, such as a 401(k), and also if your modified adjusted gross income (AGI) is above certain levels. For more details on phaseout ranges, visit IRS.gov.

Even if your income is over the limits for a tax-deductible contribution, you may be able to make a nondeductible contribution to an IRA with after-tax dollars and still enjoy tax-free growth on your investment in the years ahead.

For 2020, you may contribute to an IRA even if you’re over 70 ½.

Prior to the passage of the SECURE Act in late 2019, investors over the age of 70 ½ were restricted from contributing to an IRA. This rule has changed beginning with the 2020 tax year, allowing those who will turn 70 ½ after December 31, 2019, to make IRA contributions provided they have earned income equal to or more than the amount of the contribution.

When should you contribute?

Timing can make a difference. Putting your IRA contributions to work as early in the year as possible provides more time for your investments to grow. And with markets at historically low levels today, investing now can provide more opportunity for your investments to grow more quickly as markets recover.

This may also be an opportune time to consider converting a traditional retirement account into a Roth account. While a Roth conversion is a taxable event, it may be beneficial to incur the income tax now before tax rates are set to increase in 2026 and take advantage of tax-free growth over time and tax-free distributions later.

As noted, you still have time to open or contribute to a 2019 IRA and, if possible, should also consider making your 2020 contribution early to enjoy tax-free growth as markets recover.

Your B. Riley Wealth advisor can help you work through the options that are most suitable for your financial strategy.

 

B. Riley Wealth Management does not provide legal or tax advice. Consult your tax professional.