You asked, we answered! Due to the amazing response of tax questions that we received ahead of the podcast with Maggie Klokkenga, CPA, CFP®, we knew that we couldn’t answer them all in Mailbag. Instead, we asked Maggie to answer your questions. We have split them up by topic. So, without further ado, Maggie answers your tax-related IRA and 529 questions today.
What are the income limits for making tax-deductible contributions to traditional IRAs, and do they depend on your filing status?
For 2019, if you are covered by a retirement plan at work, the modified adjusted gross income (MAGI) limits are $74,000 if you’re filing as a single taxpayer, head of household or married filing separately if you didn’t live with your spouse during the year, and $123,000 if you’re married filing jointly or filing as a qualified widower.
If you’re filing as married filing separately and you lived with your spouse at any point during the year, the limit is only $10,000. The deductible amount of the contribution begins to phase out, or reduce, as your MAGI gets closer to the limit. For this question, MAGI is your AGI plus the student loan interest deduction, any excludable savings bond interest from Form 8815, along with a couple other rarely taken individual deductions. If you’re not covered by a retirement plan at work but your spouse is, the same income limits still apply for married filing jointly or married filing separately.
What are the income limits for making contributions to Roth IRAs?
Roth IRA contributions can be made for taxpayers married filing jointly whose MAGI is less than $203,000 in 2019. For single taxpayers, heads of household, and those who are married filing separately who didn’t live with his/her spouse during the year, contributions can be made until MAGI reaches $137,000. Similar to tax-deductible traditional IRA contributions, if you’re married filing separately and you lived with your spouse at any point during the year, no Roth contributions are allowed when MAGI exceeds $10,000. Also similarly, your eligibility in making a Roth IRA contribution is reduced as your MAGI gets closer to the limit. In this case, MAGI is your AGI plus any traditional IRA deduction or student loan interest deduction along with a couple other rarely taken individual deductions.
What is a back-door Roth IRA contribution, and in what circumstances can it be used?
Back-door Roth IRA contributions are contributions made to Roth IRAs when the taxpayer has already reached the MAGI threshold of $203,000 in 2019. Here’s why it’s called “back-door”: Instead of making a contribution directly into your Roth IRA, you make a contribution into an IRA, then convert the full amount of your contribution to the Roth IRA. So, in essence, the contribution goes through the back door of the traditional IRA. Because the contribution was made with after-tax dollars, the conversion to the Roth IRA is not a taxable event. The back-door Roth IRA contribution effectively works when a taxpayer has not yet funded a traditional IRA or has $0 in the IRA.
Once the 529 account has been depleted for college tuition, is anything tax-deductible?
If the 529 account is depleted, you can still continue to maximize the annual contribution to the 529 while your child is in college so that you can receive the tax benefit, assuming one is offered in your state. Make the contribution to the 529, then take the money right back out and pay qualified college expenses.
If you would rather just pay tuition out of pocket, check to see if you have already claimed the American Opportunity Tax Credit, which is up to $2,500 per student for four years. If you have already claimed that, there is the Lifetime Learning Credit, which is up to $2,000. Both of these credits are phased out at different income thresholds. Taxpayers also have used the Tuition and Fees Deduction, but that expired at the end of 2017.
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