The COVID pandemic has changed a lot of things in all of our lives, and tax deadlines are no different. You now have until Monday, May 17th to do few things that count toward the 2020 tax year. Among them:
- File your taxes – the deadline has been extended from the traditional April 15th due date
- Make a tax-deductible contribution to an IRA for 2020 – $6,000 maximum for those under age 50 / $7,000 for those over age 50
- Contribute to a ROTH IRA for 2020 – same maximums as above
- Make a tax-deductible contribution to a SEP IRA if you a small business or sole proprietor – $57,000 maximum
Keep in mind that the deductibility of your contributions will depend on your particular tax situation. Also note that any estimated tax payments were still due by April 15th.
With regard to deductible Traditional IRA and SEP IRA contributions, these can be helpful in reducing taxes owed in addition to saving for retirement. For all retirement accounts, the age at which you can take withdrawals without penalty is 59.5, and you are required to start withdrawals at age 72.
From Charles Schwab: “The U.S. government charges a 10% penalty on early withdrawals from a Traditional IRA, and a state tax penalty may also apply. You may be able to avoid a penalty if your withdrawal is for:
First-time home purchase
Some types of home purchases are eligible. Funds must be used within 120 days, and there is a pre-tax lifetime limit of $10,000.
Some educational expenses for yourself and your immediate family are eligible.
Disability or death
If you’re disabled, you can withdraw IRA funds without penalty. If you pass away, there are no withdrawal penalties for your beneficiaries.
You can avoid an early withdrawal penalty if you use the funds to pay unreimbursed medical expenses that are more than 7.5% of your adjusted gross income (AGI).
Birth or adoption expenses
New parents can now withdraw up to $5,000 from a retirement account to pay for birth and/or adoption expenses penalty-free.
If you’re unemployed for at least 12 weeks, you may withdraw funds to pay health insurance premiums for yourself, your spouse, or your dependents.
You can avoid an early withdrawal penalty if you choose to receive your funds on a regular distribution schedule.
If a distribution is the result of an IRS tax levy, IRS Form 5329 explains how to claim your penalty exception.
Members of the National Guard and reservists can take penalty-free distributions if they are called to active duty for at least 180 days. Some restrictions apply.”
Ideally, you do not need to dip into your IRA early for non-retirement expenses. The amount of gas we used to drive our family on a 16-hour road trip to Florida almost caused us to have to dip into retirement savings (okay, not really!). It was quite the ordeal, but we packed well (LOTS of snacks) and I was pretty impressed with how everyone did (even the dog).