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March 25, 2021

Individual Retirement Arrangement (IRA)

Your Guide

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Definition

Individual retirement arrangement (IRA) is an umbrella term that covers individual retirement account and individual retirement annuity. These are retirement savings vehicles established by individual taxpayers.

There are several versions of an individual retirement arrangement,

(a) traditional IRAs, where assets accrue earnings on a tax-deferred basis and distributions are treated as ordinary income,

(b) Roth IRAs, where assets accrue on a tax-deferred basis, but qualified distributions are tax-free

(c) SEP IRAs, which are established and funded by business owners/employers for their employees. The funding vehicle for a SEP IRA is a traditional IRA and

(d) SIMPLE IRAs, are established and funded by business owners/employers for their employees. Employees may also make salary deferral contributions to SIMPLE IRAs, and versions of SEPs that are referred to as SARSEPs.

  • Individual retirement account is the ‘account’ version of an individual retirement arrangement. The account can be established at a bank, credit union, brokerage firm, savings & loan, or other financial institution that satisfies the requirements established under the tax code IRC § 408(n)
  • Individual retirement annuity is the annuity-contract version of an individual retirement arrangement, issued by an insurance company. IRC § 408(b)

Referring Cite

IRC § 408 (a), IRC § 408 (b), IRS Publication 590

Additional Helpful Information

Individuals may contribute up to 100% of their taxable compensation/income up to the dollar limit that is in effect for the year to their traditional and/or Roth IRAs. Individuals who reach age 50 by the end of the year may contribute additional amounts referred to as ‘Catch-up’ contributions.

The dollar limits for 2005  and after are as follows:

Year

IRA contribution  limit

Catch-up contribution limit

2005

$4,000

$500

2006

$4,000

$1,000

2007

$4,000

$1,000

2008

$5,000

$1,000

2009

$5,000

$1,000

2010

$5,000

$1,000

2011

$5,000

$1,000

2012

$5,000

$1,000

2013

$5,500

$1,000

2014

$5,500

$1,000

2015

$5,500

$1,000

2016

$5,500

$1,000

2017

$5,500

$1,000

2018

$5,500

$1,000

2019$6,000$1,000
2020$6,000$1,000
2021$6,000$1,000
  • An individual can split the annual limit between a traditional and a Roth IRA, or contribute the entire amount to either. Eligibility requirements apply to Roth IRA contributions.
  • These contributions must be made in cash

Roth IRA Contributions Eligibility Limits

Individuals may contribute to a Roth IRA only if their MAGI does not exceed a certain amount. The limits are as follows:

Tax Filing Status

2021 MAGI

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2020 MAGI

Allowed contribution

Single or Head of Household

$125,000 or less

$124,000 or less

100%

$125,000 to $140,000

$124,000 – $139,000

Partial

$140,000 or more

$139,000 or more

None

Married filing jointly

$198,000 or less

$196,000 or less 

100%

$198,000 to $208,000

$196,000 -$206,000

Partial

$208,000 or more

$206,000 or more

None

Married filing separately

Less than $10,000

Less than $10,000

Partial

$10,000 or more

$10,000 or more

None

Traditional IRA Deductibility

Individuals who are active participants are eligible to deduct their traditional IRA contributions, only if their MAGI amounts do not exceed certain limits. For details on how this works, see the article Active Participant Status–Can You Deduct Your IRA Contribution?

The MAGI that applies to each tax-filing status is as follows:

Tax Filing Status

2021 MAGI

(c) www.deniseappleby.com

2020 MAGI

Allowed deduction

Single or Head of Household  

$66,000 or less

$65,000 or less

100%

$66,000 – $76,000

$65,000 – $75,000

Partial

$76,000 or more

$75,000 or more

None

Married filing jointly or a qualifying widower, and active

$105,000 or less

$104,000 or less

100%

$105,000- $125,000

$104,000- $124,000

Partial

$125,000 or more

$124,000 or more

None

Married filing jointly. Not active, but spouse is active

$198,000 or less

$196,000 or less

100%

$198,000 – $208,000

$196,000 – $206,000

Partial

$208,000 or more

$206,000 or more

None

Married filing separately

Less than $10,000

Less than $10,000

Partial

$10,000 or more

$10,000 or more

None

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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Salary Deferral Contribution

Definition A contribution made pursuant to a participant’s election to have a portion of his/her salary/wages  contributed to his/ her employer sponsored plan  rather than

Annual Addition Limit

Definition The annual Addition limit is the maximum amount that may be added to a defined contribution plan on behalf of a participant for any

Deduction

Definition A deduction is a Tax write-off which is allowed for contributions to traditional IRAs or employer sponsored plans. Individuals who are active participants are

Excess deferral

Definition Salary deferral contributions, contributions are limited to the lesser of the IRC § 402(g) limit or 100% of compensation. Salary deferral contributions in excess

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