See how making the maximum contribution to an IRA and the power of tax-deferred compounding can add up over time.
With fewer companies offering pensions and Social Security making up a smaller percentage of the average retiree’s income, individuals have to rely more on their own savings for living in retirement. That’s where an IRA can come in: It lets you save for retirement and take advantage of tax benefits.
Similar to a qualified employer-sponsored retirement plan (QRP), such as a 401(k), 403(b), or governmental 457(b), investments in IRAs have tax-advantaged growth potential. This typically allows you to accumulate retirement savings faster than you would in a taxable account.
Even if you already participate in a QRP, you should consider investing in an IRA. It can help supplement these savings and likely give you access to a wider range of investment choices than a QRP offers.
You need to make your Traditional and Roth IRA contributions by the individual tax-filing deadline.
Total annual contributions to a Traditional IRA, Roth IRA, or both cannot be more than the annual maximum for your age or 100% of earned income, whichever is less.
2020 tax year maximum annual contribution:
$6,000 if you’re younger than 50
$7,000 if you’re 50 or older within 2020
Open the Traditional IRA section (below) for information on the deductibility of your contribution and the Roth IRA section (below) for information on contribution limits.
It is generally a good idea to maximize your IRA contribution to potentially gain the full benefit of tax-advantaged savings and increase your retirement assets.
At Wells Fargo Advisors, you can make contributions to your IRA online or using your mobile device1. A contribution received between January 1 and the tax-filing deadline must indicate whether it is for the current year or prior tax year. If no year is indicated, it is considered a current-year contribution.
A Traditional IRA offers tax-deferred growth potential. You pay no taxes on any investment earnings until you withdraw, or “distribute,” the money from your account, presumably in retirement.2
Beginning in tax year 2020, you can contribute to a Traditional IRA regardless of your age, as long as you, or you spouse if filing jointly, have earned income. However, the amount that you can deduct from your taxable income depends on the following:
If you, and if married your spouse, are not covered3 by a workplace retirement plan (WRP) such as a 401(k), 403(b), SEP IRA, or SIMPLE IRA:
Full deduction regardless of MAGI in 2020
If you, and if married your spouse, are covered3 by a WRP:
Fully deductible if MAGI is less than $65,000 (single) or $104,000 (joint) in 2020
Partially deductible if MAGI is between $65,000 and $75,000 (single) or $104,000 and $124,000 (joint) in 2020
No deduction if MAGI is over $75,000 (single) or $124,000 (joint) in 2020
If you are not covered3 by a WRP and your spouse is:
Fully deductible if MAGI is less than $196,000 (joint) in 2020
Partially deductible if MAGI is between $196,000 and $206,000 (joint) in 2020
No deduction if MAGI is over $206,000 (joint) in 2020
If you are covered3 by a WRP and married filing separately4:
Partially deductible for MAGI up to $10,000 in 2020
No deduction for MAGI more than $10,000 in 2020
A Roth IRA offers tax-free growth potential. You are eligible to contribute to a Roth IRA at any age as long as you or your spouse, if filing jointly, have earned income and your modified adjusted gross income (MAGI) is at or below the phase-out limits.
During the 2020 tax year your Roth IRA contribution is phased out based on MAGI:
Full contribution if MAGI is less than $124,000 (single) or $196,000 (joint)
Partial contribution if MAGI is between $124,000 and $139,000 (single) or $196,000 and $206,000 (joint)
No contribution if MAGI is over $139,000 (single) or $206,000 (joint)
Since contributions to a Roth IRA are made with after-tax dollars, there is no tax deduction, regardless of your income. Qualified distributions, which are tax-free and not included in gross income, occur when your account has been open for more than five years and any one of the following applies2:
You are at least age 59½.
You are disabled.
You are using the first-time homebuyer exception.
The payment is made to your beneficiary after your death.
You do not have to take required minimum distributions (RMDs) from a Roth IRA during your lifetime, optimizing the opportunity to build tax-free wealth.
If your employer offers a SIMPLE IRA or SEP IRA retirement plan and you want to take advantage of it, you need to open a SIMPLE IRA or SEP IRA to hold your plan assets.2
A SIMPLE IRA plan lets eligible employees make contributions to their SIMPLE IRA on a pre-tax basis. In addition, the employer must make either matching or non-elective contributions.
A SEP plan lets an employer make deductible contributions for eligible employees to IRAs that plan participants have established.
Required minimum distributions (RMDs) rules outlined below are waived for 2020 distributions from IRAs, including Inherited IRAs and 2019 RMDs not taken in 2019 with a required beginning date of April 1, 2020. RMDs are also waived for Defined Contribution Plans, including 401(k), 403(b), 457(b).
If you turned age 70½ on or before December 31, 2019, the IRS requires you take your first required minimum distribution (RMD) from your Traditional, SEP and SIMPLE IRAs by April 1 following the year you reach age 70½ . If you turn age 70½ on or after January 1, 2020 your RMDs begin by April 1 following the year you turn age 72. Subsequent RMDs must be taken by December 31 of each year. You will owe ordinary income tax on the taxable portion of the distributions.
Are you considering the various options for the savings you have accumulated in QRPs such as 401(k), 403(b), or governmental 457(b) plans? Know that what you choose to do with these savings can have a substantial impact on your future.
You generally have four options for your QRP distribution:
Roll the assets in to an IRA
Leave the assets in your former employer’s QRP, if the plan allows
Move the assets to your new/existing employer’s QRP, if the plan allows
Take your money out and pay the associated taxes
Each of these options has advantages and disadvantages, and the one that is best depends on your individual circumstances. You should consider features such as investment choices, fees and expenses, and services offered5.
It can be a confusing decision to make. Here are some things to think about:
The difference in fees and expenses between the QRP and IRA
When distributions can be taken with no 10% additional tax
Your need for help making investment decisions
The favorable tax treatment of employer securities that may have increased in value in the QRP
When you have to begin required minimum distributions (RMDs)
Protection of retirement assets from creditors and bankruptcy
Your Financial Advisor can help educate you regarding your choices so you can decide which one makes the most sense for your specific situation. Speak with your current retirement plan administrator and tax professional before taking any action.
There are a variety of reasons why you may want to convert a Traditional, SEP or SIMPLE6 IRA as well as your qualified employer-sponsored retirement plan (QRP), such as a 401(k), savings to a Roth IRA. Some reasons conversions may be appropriate include:
You are willing to pay taxes now for the possibility of tax-free distributions in retirement
You do not have to take required minimum distributions (RMDs) during your lifetime
The state you live in does not have income tax but will retire to a state with income tax
To convert, you will pay federal and, possibly, state income tax on the taxable amount of the conversion. There is no 10% additional tax on conversions made prior to age 59½. Also, you will not have to sell the account assets as they can be converted as an “in kind” transfer.
It is important to know what your tax situation is and your ability to pay for the conversion because once you convert you cannot recharacterize or undo the conversion. Be sure to speak with your tax professional before completing a Roth IRA conversion.
You or your spouse, if filing jointly, must have earned income for the tax year for which you are making the contribution. Generally, compensation is what you earn from working such as wages, tips, or commissions. See Publication 590-A (PDF) for a comprehensive list of what is considered earned income.
IRA Disclosure Statement and Custodial Agreement: The Disclosure Statement and Custodial Agreement is designed to provide you with an overview of an IRA including tax benefits and considerations, as well as contribution and distribution rules. The first part of each document includes the disclosure statement required by the Internal Revenue Service. The disclosures will explain the basic rules and tax considerations you should understand if you adopt an IRA. The second part of the document includes the Custodial Agreement. Click here to view the documents.
1 Brokerage IRAs with Brokerage Cash Services are eligible for this feature. Online access is required. Talk to your Financial Advisor for more information about the benefits of Brokerage Cash Services.
2 Traditional IRA distributions are generally taxed as ordinary income. Qualified Roth IRA distributions are tax-free provided a Roth account has been open for more than five years and the owner is at least age 59½, or as a result of their death, disability, or using the first-time homebuyer exception. Qualified Roth IRA distributions are not subject to state and local taxation in most states. Distributions from Traditional and Roth IRAs may be subject to an IRS 10% additional tax for early or pre-59 1/2 distributions. For SIMPLE IRAs, the IRS penalty increases to 25% if a distribution is taken prior to two years from when the first deposit was made into the SIMPLE IRA if under 59½.
3 The “Retirement Plan” box in Box 13 of your W-2 tax form should be checked if you were covered by a retirement plan at work.
4 Your filing status is considered single for IRA contribution purposes if you did not live with your spouse during the tax year. Read IRS Publication 502 for more information https://www.irs.gov/pub/irs-pdf/p501.pdf.
5 Please keep in mind that rolling over assets to an IRA is just one of multiple options for your retirement plan. Each of the following options is different and may have distinct advantages and disadvantages.
Roll assets to an IRA
Leave assets in your former employer’s plan, if plan allows
Move assets to your new/existing employer’s plan, if plan allows
Cash out or take a lump sum distribution
When considering rolling over assets from an employer plan to an IRA, factors that should be considered and compared between the employer plan and the IRA include fees and expenses, services offered, investment options, when penalty free withdrawals are available, treatment of employer stock, when required minimum distributions begin and protection of assets from creditors and bankruptcy. Investing and maintaining assets in an IRA will generally involve higher costs than those associated with employer-sponsored retirement plans. You should consult with the plan administrator and a professional tax advisor before making any decisions regarding your retirement assets.
6 Can only be converted after two years from first SIMPLE IRA deposit.