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George F. Bearup, J.D. Senior Legal Trust Advisor

25-Apr-21

Roth Reminder

Take-Away: Roth IRA contributions and ‘backdoor’ Roth contributions can be made until May 17, 2021.

Background: With the IRS’s recent extension in which to file 2020 Form 1040 income tax returns until May 17, 2021, that extension also pertains to Roth IRA contributions.

Roth IRA Contributions: That means for those individuals who are under age 50 years, they may contribute up to $6,000 to a Roth IRA, and for those individuals over that age, they may contribute a maximum of $7,000 to a Roth IRA. Recall, too, that spouses without any earned income may also contribute to a Roth IRA, subject to these dollar limits. Moreover, participation in an employer-sponsored qualified retirement plan does not disqualify an individual from making a Roth IRA contribution for 2020.

  • Extensions: If an individual’s 2020 Form 1040 is put on extension until October 15, 2021, that extension does NOT extend the time in which to make a Roth IRA contribution. May 17, 2021 is the deadline in which to make the Roth IRA contribution.
  • Reporting: There is no obligation to report a Roth IRA contribution on an individual’s Form 1040. However, to avoid any confusion by the IRA custodian, it is important to confirm that the Roth IRA contribution made before May 17, 2021, is for calendar year 2020, and not for 2021. It is also a good idea to keep the individual’s accountant informed about the Roth IRA contribution and the year for which that contribution is made.

Backdoor Roth Contributions: An individual’s income must be under specified limits in order to make a Roth IRA contribution. If the individual’s modified adjusted gross income (MAGI) exceeds $124,000, or $196,000 if the individual is married filing jointly, the ability to make a Roth IRA contribution begins to be phased out. For those individuals whose income is too high to make a Roth IRA contribution, there remains the option of a backdoor Roth IRA contribution. In basic terms, the individual makes an after-tax contribution, e.g. $2,000 to a traditional IRA. That traditional IRA is then promptly converted to a Roth IRA. In the past there was some concern if a backdoor Roth IRA was a legitimate retirement strategy, but it was recently ‘blessed’ by Congress with the SECURE Act. Like the Roth IRA deadline, the backdoor Roth IRA strategy requires the after-tax contribution to the traditional IRA to be made prior to May 17, 2021.

Conclusion: With the promise of much higher income taxes in the future under the Biden administration’s recent income tax proposals, the opportunity to take tax-free distributions from a Roth IRA in retirement is something everyone with earned income should consider.