Individual Retirement Accounts (IRAs) – IRS Website, IRS FAQs
(IRAs are one type of Retirement Plan)
| Traditional IRA | A tax-advantaged personal savings plan where contributions may be tax deductible. |
| Roth IRA | A tax-advantaged personal savings plan where contributions are not deductible but qualified distributions may be tax free. |
| Payroll Deduction IRA | A plan is set up by an employer. Employees make contributions by payroll deduction to an IRA (Traditional or a Roth IRA) they establish with a financial institution. |
| SEP | A Simplified Employee Pension plan set up by an employer. Contributions are made by the employer directly to an IRA set up for each employee. |
| SIMPLE IRA Plan | A Savings Incentive Match Plan for Employees set up by an employer. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions, and the employer makes matching or nonelective contributions. |
| SARSEP | Salary Reduction Simplified Employee Pension Plan – is a type of SEP set up by an employer before 1997 that includes a salary reduction arrangement. |
| K-1 IRA | K-1 for any IRA account, you don’t need to enter |
Roth IRA
| Roth IRA Calculators | Nerd Wallet assumes 6% rate of return Calculator.net Roth Conversion |
| Contribution Calculation 2022 | Roth IRA – IRS Website for 2022 Worksheet to Figure Modified AGI for Roth IRA 2022 |
| Contribution Calculation 2023 | Roth IRA – IRS Website for 2023 Worksheet to Figure Modified AGI for Roth IRA 2023 |
| Roth IRA Income Limits for Contributions | IRS Website, including Reduce Contribution Calculation IRS Website for 2023 Nerd Wallet |
| Contributing to Roth IRA | 2022 Max: Under age 50: $6,000 | Over age 50: $7,000 2023 Max: Under age 50: $6,500 | Over age 50: $7,500 |
| Deducting Roth IRA Contribution on your Taxes | Roth IRA contributions are not tax-deductible (IRS Website) |
| Roth IRA Basis | total contribution – total withdraws |
| Roth IRA Taxable Amount | distribution – Roth IRA Basis; if <=0, no taxes |
| Roth IRA Withdrawals | You can withdraw contributions (the money you put into your Roth) at any time and without penalty. Because, you already paid taxes on that money. You can withdraw earnings after age 59 1/2 and after owning the account for at least five years. Withdrawing that money earlier can trigger taxes and an 10% early withdrawal penalty. Exceptions (IRS website) that allow you to avoid 10% early withdrawal penalty include: being permanent disabled, buy, build or rebuild first home, medical expenses that are more than 7.5% of AGI, etc. |
| Backdoor Roth IRA | Backdoor Roth IRA – allows high-income individuals to access a Roth IRA, which they normally wouldn’t be allowed to do because of income limits set by the IRS. This legal loophole enables high-earners to open a traditional IRA, make contributions, then immediately convert the account to a Roth IRA. |
| How to Do a Backdoor Roth IRA Conversion | Backdoor Roth IRA Conversion 1. Open a new traditional IRA 2. Make a non-deductible contribution (with after-tax money) —preferably as a lump sum to potentially avoid or minimize taxes from capital gains—up to $6,000 ($7,000 over 50 years old) and leave the money in cash via a money market fund or settlement fund. 3. Because the contributions aren’t being deducted on taxes, there are no income restrictions on them. Non-deductible contributions must be listed in IRS Form 8606. 4. Immediately convert your traditional IRA to a Roth IRA. |
| Calculating Taxes on Backdoor Roth IRA Conversion | Roth conversions are considered taxable distributions by the IRS. But determining how much tax could be owed on a conversion can be complicated when an investor has more than one IRA. To do this, the IRS aggregates, or totals together, contributions from all IRAs, and calculates taxes based on a percentage of the total that’s being converted. This is called the aggregation rule. Imagine an investor already has a traditional IRA funded with $100,000 of pre-tax dollars, then opens a new IRA and makes a non-deductible (after-tax) contribution of $6,000, with plans to convert it to a Roth IRA. One might assume that no taxes would be owed on the conversion—since taxes have already been paid on that $6,000. However, the IRS views that $6,000 conversion as a 5.66% distribution on the $106,000 total, and the investor would owe income tax on $5,660. Take into consideration that the taxed money is considered income, and depending on circumstances, could increase your income and tax bracket. The IRS does not aggregate 401(k) plans and 403(b) retirement savings plans, profit sharing plans, inherited IRAs, or a spouse’s IRA for a married filing jointly situation. This process can be rather complex, so it might be helpful to consult with a financial advisor or certified financial planner. |
| Calculating State Taxes on Backdoor Roth IRA Conversion | California tax IRA Conversions Tax rules vary from state-to-state. Individual states in the U.S. treat backdoor Roth IRA conversions differently. Some have tax rules comparable to federal tax rules. Some states do not tax backdoor Roth IRA conversions. |
| Mega Backdoor Roth IRA Conversion | A mega backdoor Roth conversion uses a loophole that allows high-income earners to roll over funds from traditional IRAs and retirement plans into a Roth account, either a Roth IRA or Roth 401(k). Once the money is in a Roth, distributions taken in retirement—including earnings on original contributions—are tax free. |
| Report IRA Conversion on Tax Return | Conversions from a traditional IRA to a Roth IRA are reported on Form 1099‑R. The distribution code in Box 7 is determined by your age at the time you converted. |
Traditional IRA
| Traditional IRA Calculators | Calculator.net |
| Contribution Calculation 2022 | IRS Website for 2022 Worksheet to Figure Modified AGI for Traditional IRA 2022 |
| Contribution Calculation 2023 | IRS Website for 2023 Worksheet to Figure Modified AGI for Traditional IRA 2023 |
| Traditional IRA Income Limits for Contributions | IRS Website, IRS Publication Traditional IRA, Fidelity There are no income limits for Traditional IRAs; however, there are income limits for tax deductible contributions. You or your spouse MUST have earned income to contribute. However you cannot contribute more than you make. Consider your income, the most you can contribute across all IRAs is the LESSER of 2 amounts: the annual contribution limit or 100% of your earned income (includes taxable income and compensation, such as taxable alimony and non-taxable combat pay) |
| Contributing to Traditional IRA | 2022 Max: Under age 50: $6,000 | Over age 50: $7,000 2023 Max: Under age 50: $6,500 | Over age 50: $7,500 |
| Deducting Traditional IRA Contribution on your Taxes | IRS Website Deduction Limits IRS Website for work Retirement Plan If NO retirement plan at work, you can take full deduction If YES retirement plan at work (e.g., 401K, pension) your deduction may be limited or disallowed, depending on your income. Work Retirement Plan – full deduction if income is less than: $68,000 if you’re single $109,000 if you’re married and filing a joint return Work Retirement Plan – partial deduction if income exceed: $68,000 if you’re single $109,000 if you’re married and filing a joint return Work Retirement Plan – NO deduction if income exceed: $78,000 if you’re single $129,000 if married filing jointly |
| Traditional IRA Basis | Basis represents the after-tax balance in your account. If all of your contributions to a traditional IRA were deductible (you deducted contribution on your tax return), then you have no basis in your IRA, and your distributions are fully taxable. If you made nondeductible contributions to your IRA, the amount of your contributions equals your basis, and this money is not subject to tax upon distribution. |
| Traditional IRA Withdrawals | Any deductible contributions and earnings you withdraw or that are distributed from your traditional IRA are taxable. Also, if you are under age 59 ½ you may have to pay an additional 10% tax for early withdrawals unless you qualify for an exception. Deductible contribution are contribution that you deducted on your tax return. |
| How do I know if I made a nondeductible IRA contribution? | Any money you contribute to a traditional IRA that you do not deduct on your tax return is a “nondeductible contribution.” You still must report these contributions on your return, and you use Form 8606 to do so. Reporting them lets the IRS know whether or not you deducted the contribution. |
| Difference Between Deductible and Non-Deductible IRA | A deductible IRA can lower your tax bill by allowing you to deduct your contributions on your tax return – you essentially get a refund on the taxes you paid earlier in the year. You fund a nondeductible IRA with after-tax dollars. You cannot deduct contributions on your tax return. Which one is better? Depends on your retirement plan -when do you want to pay taxes on your money. Do you qualify for a deductible IRA -based on income filing status, whether you have access to work retirement plan, and whether you receive social security benefits. |
SEP IRA
| SEP IRA Calculators | Calculator.net |
| 5498 SEP Contributions | 1040, sch 1, p2, line 16 Current Tax Year 5498 Form This form shows what person has already contributed to their SEP. The contribution shows amount with the current tax year, but amount is for the previous tax year. For Example: Tax year 2023, 5498 statement show SEP contribution of $30,000. However, the $30,000 is for tax year 2022. So, you need to calculate how much person can contribute for tax year 2023. Inform person of the amount, and make sure person makes the payment. If they do not make the payment, remove amount from SEP contribution. If you do not remove amount, person has incorrect income adjustment on 1040, p1, line 10. ATX Calculation – Calculate Amount Client can Contribute to SEP IRA – 1040, sch 1, p2, line 16; click arrow – Filer and/or Spouse column, select 2-SEP for “Compute maximum allowable contribution” – Make sure client makes the contribution before filing their taxes. If client does not make the contribution, then remove this amount from taxes. Lacerte Calculation – Calculate Amount Client can Contribute to SEP IRA – 24 (Adjustment to Income) – Section = SEP, Simple, Qualified Plans – Self-employed SEP = enter 1 for system to calculate maximum amount – If tax payer can contribute, amount shows on 1040, sch 1, p2, line 16 |
| SEP | Determine how much you can contribute to SEP / IRA Note: Confirm with client that they actually contribute the money before finalizing the return. OR, client may have received form 5498 showing their SEP contribution. For Self Employed 1040, Sch 1, p2, line 16 Contribution amt = Business Net Income * 25% Bus Net income = gross income – (expenses + self empl taxes) For Employers 1040, Sch 1, p2, line 16 Contribution amt = 25% of the employee’s compensation, or $61,000 (for 2022); which ever is less System Can Calculate Max Amount You Can Contribute – 1040, sch 1, p2, line 16; click arrow, – select option “2 – SEP” for filer and / or spouse, for “Compute maximum allowable contribution” Note: 1. While SEP is a business deduction, it is not deducted on Schedule C. Q: I have a couple million in earnings this year, will that “phase out” the deductibility of the contribution to a SEP? A: The SEP contribution deduction does not phase out. The limitation is on how much can be contributed to a SEP, but there is no income phase out of the deduction. |
| Contributing to SEP IRA | IRS Website Contributions Employer can make to Employee’s SEP IRA cannot exceed the lesser of: 25% of the employee’s compensation, or $66,000 (for 2023) 25% of the employee’s compensation, or $61,000 (for 2022) 25% of the employee’s compensation, or $58,000 (for 2021) 25% of the employee’s compensation, or $57,000 (for 2020) For Self-Employed Contribution amt = Business Net Income * 25% Bus Net income = gross income – (expenses + self empl taxes) Contributions are limited to 25% of your net earnings from self-employment (not including contributions for yourself), up to $61,000 for 2022 ($58,000 for 2021; $57,000 for 2020). Elective salary deferrals and catch-up contributions are not permitted in SEP plans. If you’ve contributed more than the annual limits to an employee’s SEP IRA, find out how to correct this mistake. |
| SEP IRA Account | IRS Website, SEP IRA Plan A SEP-IRA account is a traditional IRA and follows the same investment, distribution, and rollover rules as traditional IRAs. |
| Deducting SEP IRA Contribution on your Business Taxes | IRS Website The most you can deduct on your business’s tax return for contributions to your employees’ SEP-IRAs is the lesser of your contributions or 25% of compensation. (Compensation considered for each employee is limited and subject to annual cost-of-living adjustments). If you are self-employed and contribute to your own SEP-IRA, there is a special computation to figure the maximum deduction. Note: While SEP is a business deduction, it is not deducted on Schedule C. It is deducted on 1040, Sch 1, p2, line 16 |
| SEP IRA Basis | Follow same rules as Traditional IRA Basis If all of your contributions to a traditional IRA were deductible (you deducted contribution on your tax return), then you have no basis in your IRA, and your distributions are fully taxable. If you made nondeductible contributions to your IRA, the amount of your contributions equals your basis, and this money is not subject to tax upon distribution. |
| SEP IRA Withdrawals | Follow same rules as Traditional IRA Basis Any deductible contributions and earnings you withdraw or that are distributed from your traditional IRA are taxable. Also, if you are under age 59 ½ you may have to pay an additional 10% tax for early withdrawals unless you qualify for an exception. Deductible contribution are contribution that you deducted on your tax return. |
IRA Q&A
| Total Contribution to Roth and Traditional IRA | IRS Website 2022, 2021, 2020 and 2019 Total contributions you make each year to all of your traditional IRAs and Roth IRAs can’t be more than: (a) $6,000 ($7,000 age 50 or older), or (b) if less, your taxable compensation for the year. For 2023 Total contributions you make each year to all of your traditional IRAs and Roth IRAs can’t be more than: (a) $6,500 ($7,500 age 50 or older), or (b) If less, your taxable compensation for the year The IRA contribution limit does not apply to: Rollover contributions Qualified reservist repayments |
| How to Know if your IRA is a Roth or Traditional | Check the paperwork you received when you first opened the account. It will explicitly state what type of account it is. |
| Key Difference Between Roth and Traditional IRA | Difference lies in the timing of their tax advantages. Traditional IRAs you deduct contributions on your taxes now and pay taxes on withdrawals later. Roth IRAs allow you to pay taxes on contributions now (using after tax money) and get tax-free withdrawals later. |
| Can you have Roth IRA and Traditional IRA | Yes, as long as you stay with the max IRS limits, and you are eligible from an income standpoint – you can max out each one. |
| Can you have a Roth IRA and 401K | Yes, as long as you stay with the max IRS limits, and you are eligible from an income standpoint – you can max out each one. |
| Can you have a Traditional IRA and 401K | Yes, as long as you stay with the max IRS limits, and you are eligible from an income standpoint – you can max out each one. |
| Can you have Roth IRA, Traditional IRA, and 401K | Yes, as long as you stay with the max IRS limits, and you are eligible from an income standpoint – you can max out each one. |
| Max Contributions to Roth IRA, Traditional IRA, 401k, and Roth 401K | You can contribute to all four retirement accounts as long as your contributions stay under the IRS limits. The maximum amount an individual can contribute to all four accounts is $31,500, or $40,000 for those 50 and older. Contributions made towards both a 401(k) and Roth 401(k) can’t total more than the limit of $19,500. While $6,000 can be contributed each towards a traditional IRA and a Roth IRA. Additionally, an employer’s matching contributions towards a 401(k) can’t increase the total 401(k) contribution to more than $58,000 or 100% of your income, whichever is less. |
| Tax on Excess IRA Contributions | IRS Website Excess IRA contribution occurs if you: (1) Contribute more than the contribution limit. (2) Make a regular IRA contribution for 2019, or earlier, to a traditional IRA at age 70½ or older. (3) Make an improper rollover contribution to an IRA. Excess contributions are taxed at 6% per year for each year the excess amounts remain in the IRA. The tax can’t be more than 6% of the combined value of all your IRAs as of the end of the tax year. To Avoid the 6% tax on excess contributions, you must withdraw: The excess contributions from your IRA by the due date of your individual income tax return (including extensions); and any income earned on the excess contribution. |
| Where report Roth IRA Conversion on 1040 | You will receive a Form 1099-R from your financial institution reporting the Roth conversion. It will be coded as a rollover to a Roth IRA. You’ll use the information from that form to report your Roth conversion income on Form 8606 with the taxable portion of the conversion income reported on your Form 1040. |
| Required Minimum Distributions (RMD) from IRAs | Anyone who attains the age of 72 is required to take minimum distributions from IRA, SEP IRA, SIMPLE IRA or retirement plan. Roth IRAs do not require withdraws until aft the death of the owner. Should receive from 1099-R nothing to enter from RMD monthly or yearly statement IRS required minimum distributions are not optional. If you don’t take or forget to take the minimum amount each year, you’ll likely have a 50% penalty on your hands for the amount not distributed. Let’s say your RMD amount for last year was $6,000, but you only took out $2,000. That means you had another $4,000 left to withdraw — that amount is subject to the 50% penalty. In other words, you’d lose $2,000 to the required minimum distribution penalty. Required Minimum Distributions are Minimum withdrawal amounts are based on life expectancy. So, first figure your required minimum distribution using IRS life expectancy tables. You can find those on the IRS website. Then, you can take the full amount from just one retirement account or from several accounts. You can also choose to take it all on one day in the year or spread it out over several distributions. Some banks and investment plans will offer automatic options, so you don’t have to remember to request the distribution. What if you don’t need the money to live off at the moment? Is a rollover a possibility for avoiding a penalty? Unfortunately, no. IRS required minimum distributions aren’t eligible for rollover. You must pay tax on them. |
| Do I have to report my IRA contributions on my tax return? | The contributions you make to the IRA should be reported appropriately on your tax return. If you are eligible to claim a tax deduction on your IRA contributions, you can report the IRA contributions on Form 1040 Schedule 1 Part II Adjustments to Income. You should report any nondeductible IRA contributions made in the past year on line 1 of Form 8606. |
| Do I need to report Roth IRA contributions on tax return? | IRS website, see Roth IRAs No. You don’t report the contribution to Roth IRA on your tax return. Contributions to a Roth IRA aren’t deductible, but qualified distributions or distributions that are a return of contributions aren’t subject to tax. |
| What happens if I don’t report my IRA contributions? | If you do nothing, the IRS will treat your contributions as though they were deductible (meaning you deducted them on your tax return), and tax them when you make withdrawals at retirement. You can file IRS Form 8606 to declare your IRA contributions as nondeductible, and take withdrawals tax-free later. Note: This is for Traditional IRAs, not Roth IRA. |
| Does taking money from IRA affect Social Security benefits? | Social Security does not count pension payments, annuities, or the interest or dividends from your savings and investments as earnings. They do not lower your Social Security retirement benefits. |
| Do I have to report IRA to Social Security? | No. Social Security defines “earned income” as wages from a job or net earnings from self-employment, and it only counts earned income in its calculation of whether and by how much to withhold from your benefits. |
| When is form 8606 Required | File Form 8606 each year that: A nondeductible (i.e., after-tax) regular contribution is made to a traditional IRA A distribution from any traditional, simplified employee pension (SEP), or Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA is taken, and that individual owns (or is the beneficiary of) an IRA that contains nondeductible contributions or other basis (e.g., after-tax assets rolled over from an employer plan) All or a portion of a traditional, SEP, or SIMPLE IRA was transferred from an IRA of one spouse to an IRA of the other spouse due to a divorce or separation instrument, and the transfer resulted in a change of basis for either spouse A traditional, SEP, or SIMPLE IRA-to-Roth IRA conversion is completed, or A nonqualified distribution is taken from a Roth IRA. |
| Distributions from IRAs and Retirement Plans for Births and Adoptions | 2023 1. Individuals and couples who have a baby or adopt a child can withdraw up to to $5,000 from their retirement accounts, including 401(k) or IRA without the 10% early distribution penalty. 2. A couple can take up to $10,000 out penalty-free if they each have separate retirement accounts. 3. You do not have to pay money back to retirement account 4. This rule started in 2020 under Further Consolidated Appropriations Act 2020 |
| Inherited IRAs | Beneficiaries of Inherited IRAs 1. If inherited from decedent dying after 12/31/2019, beneficiaries must take all distributions no later than 10 years after decedent’s death. However this rules does not apply to: a. A Surviving spouse. The spouse can roll over an inherited account and treat it as their own b. Minor child c. Disabled individuals d. Any individual who is not more that 10 years younger than the deceased participant or IRA owner. 2. If inherited from decedent dying before 12/31/2019, beneficiaries can spread distribution over their life expectancy. |