High Earner? The 2021 Traditional IRA Benefits Just Became a Little Sweeter

If you made too much money to contribute to a Roth IRA, you can always stash some cash away in a traditional IRA. It’s another tax-advantaged account that offers perks that you can use immediately — especially since the 2021 increase in income ranges made this retirement jewel even more appetizing. Being a higher earner now means you’re in a great position to set yourself up for a fantastic retirement and enjoy immediate tax savings not available to Roth IRA contributors.

People in business suits grabbing piles of money off table.

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Instant benefits at your fingertips 

Every savvy investor is always on the hunt for incentives that can reduce their annual tax bill. For many, those perks begin and end with tax breaks that are given based on contributions to workplace retirement savings plan, often a 401(k) or 403(b). But don’t sell yourself short. If you’re a high-earner, the traditional IRA adds some extra features to your tax-planning strategy that can expedite your retirement goals. You can open and fund your account with tax-free contributions (you’ll pay taxes on the money later), invest in a broader range of assets, and possibly deduct your contributions on your tax return — even if you are blessed with a workplace retirement plan. 

Anyone can contribute to a traditional IRA irrespective of income status. As long as you are earning money, you can contribute to an IRA. While the Roth IRA is known for its strict income limits that exclude higher-income earners, you don’t have to worry about those restrictions with the traditional IRA. 

When tax time arrives, you’ll be happy you contributed to a traditional IRA because the tax savings are too good to turn down. If you contribute $5,000 to a traditional IRA, you get to remove $5,000 from your earnings calculation — avoiding taxes on that amount until a later date. Your $5,000 investment can grow without worrying about the pain of paying taxes every year. 

Every good thing has its limits 

A traditional IRA is very enticing because it gives you the flexibility to contribute at any income level; however, you can only make a maximum contribution of $6,000 if you’re under 50 ($7,000 for people 50 and over). You should also keep in mind that you won’t be able to make tax-deductible contributions if either you or your spouse is covered by a workplace retirement plan and you exceed income limits.  

Fortunately, all your contributions are tax-deductible if you are single or head of household making less than $66,000 or married filing jointly making less than $105,000. As soon as your income exceeds those limits, you have entered the danger zone — more commonly referred to as “phase-out range”. This means that your contributions to your traditional IRA are subject to a reduced deduction amount on your tax return. Once you’ve exceeded the highest amount in the phase-out range, you can no longer make a tax-deductible contribution to a traditional IRA; however, you are always welcome to make a nondeductible contribution to allow your investments to grow tax-free, defer taxes on gains, or make a backdoor Roth IRA contribution. 

Traditional IRA Income Phase-Out Ranges 

Tax Filing Status 

2021 Income Range 

2020 Income Range 

Single and head of household filers covered by a workplace retirement plan 

$66,000 to $76,000

$65,000 to $75,000

Married filing jointly covered by a workplace retirement plan

$105,000 to $125,000

$104,000 to $124,000

Married filing jointly, where one spouse is not covered by a workplace retirement plan 

$198,000 to $208,000

$196,000 to $206,000

Married filing separately filers covered by a workplace retirement plan 

$0 to $10,000 

$0 to $10,000 

Data source: IRS.

Good news: if you or your spouse are not covered by a workplace retirement plan like a 401(k) or 403(b), these income limitations do not apply. All of your contributions you make to a traditional IRA are tax-deductible and can save you money during tax time.

Don’t get carried away with contributions

As alluring as the traditional IRA tax benefits are, make sure you don’t contribute more than the allowable amount or you could be faced with excess contribution penalties of 6% — that can add up because it applies for each year the extra funds remain in your retirement plan. You don’t want to squander your hard-earned retirement cash, so be sure to review the annual IRA contribution limits. 

As long as you follow the rules, the traditional IRA becomes a true treasure when you’re in your peak earning years. You won’t be taxed until you take distributions in retirement and can enjoy the tax savings now. Because the income ranges have been expanded for 2021, even more people will be able to make tax-deductible contributions — creating a way to keep more money in your pockets and invest in your favorite stocks as we navigate the uncertainties ahead. 

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