Contribution Rules

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Each year, as April 15th approaches, we are proactive in reviewing the tax planning strategies of our clients to ensure that an optimal IRA contribution is made prior to the deadline. There is often confusion regarding the various rules and limitations that govern IRAs.


Most people are familiar with an IRA. An Individual Retirement Account (IRA) is an account set up at an institution that allows an individual to contribute up to a certain amount each year toward their retirement in a tax-advantaged manner.

A Traditional IRA allows one to contribute pre-tax dollars, deferring taxes until withdrawals. All growth (capital gains, dividend payments, and interest income) is generated on a tax-deferred basis. This allows the investor to reduce their taxable income in the current year and defer paying taxes on those monies until retirement when they will most likely be in a lower tax bracket. Roth IRA contributions, on the other hand, are made with post-tax monies, allowing for tax-free growth and tax-free withdrawals during retirement.

A 2020 IRA contribution can be made between January 1, 2020, and April 15, 2021.

Not to be confused with contributions, Roth conversions allow one to take part of the balance of a Traditional IRA and move it to a Roth IRA. Conversions allow one to pay taxes now, rather than later when the rates may increase, or when social security and RMDs bump one into the next tax bracket. Not to mention, a conversion to a Roth IRA allows for tax-free growth of the investments. It is important to understand what the tax implications of conversion are prior to making the conversion. December 31st is the deadline for Roth conversions each year.


  • The maximum allowed combined contribution for Traditional and Roth IRAs is $6,000 for those under age 50, and $7,000 for those age 50 and over. This will remain the same for 2021.
  • Contributions can only be made from earned income. Earned income includes salary and wages, and excludes social security, alimony, and passive income, among other things. If earned income is less than the contribution limit, one can only contribute up to their earned income. For example, if one earned $5,000 in 2020, their IRA contribution cannot exceed $5,000 in 2020.
  • A Spousal IRA can be established for a non-wage-earning spouse. The spouse with earned income can contribute on behalf of their spouse in accordance with the above limitations. One must be married and file a joint tax return to be eligible for a Spousal IRA, which can be set up as either a Traditional or Roth account.


A disadvantage of Roth IRAs is that they have income limitations that make one ineligible to contribute. To be eligible for Roth IRA contributions in 2020, one’s modified adjusted gross income (MAGI) must be less than $206,000 for a married couple filing jointly, and less than $139,000 for a single filer.

These income limitations have been increased for 2021 to $208,000 and $140,000 respectively.

Keep in mind there are no income limitations for Roth conversions.


Unlike Roth IRAs, there are no income limits that keep one from contributing to a Traditional IRA. However, the ability to take tax deductions on these contributions can still be at risk.

A full deduction up to the amount of one’s contribution is allowed as long as they, nor their spouse, are covered by a retirement plan at work (such as a 401k).

If either spouse is covered by a retirement plan at work, the tax-deductible contributions to a Traditional IRA may be reduced or eliminated. In this situation, a married couple filing jointly becomes ineligible for tax-deductible contributions if their MAGI is $124,000 or more. If a single filer has MAGI of $75,000 or more, no deduction can be taken on their contributions.

These deduction limitations have been increased for 2021 to $125,000 and $76,000, respectively.


Beware of over contributing! While it is good to max out your IRA contributions, if you contribute too much, or contribute to a roth when your income is too high, you’ll owe a 6% penalty on the excess contribution each year until the mistake is remedied.

At Park Place Financial we strive to educate our clients on all retirement and tax planning strategies available. Schedule a complimentary consultation to make sure you have taken advantage of making IRA contributions before April 15th!


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