IRS Pub 590-A 2022: IRA Contribution & Deduction Rules

IRS Publication 590-A, “Contributions to Individual Retirement Arrangements (IRAs),” is the official IRS guide for IRA contribution rules for a specific tax year. This publication details the regulations for Traditional and Roth IRAs, including eligibility, contribution limits, and timing. This article distills the information from the 2022 edition of Publication 590-A to help taxpayers understand the rules governing their retirement contributions for the 2022 tax year.

Establishing an Individual Retirement Arrangement

Before contributing to an Individual Retirement Arrangement (IRA), an account must be established at a financial institution like a bank, credit union, or brokerage firm. The process involves completing an application with the chosen institution, known as the custodian. For the 2022 tax year, the deadline to both open and fund an IRA was the tax filing deadline of April 18, 2023.

Obtaining a tax filing extension does not extend the deadline for making IRA contributions. When making a contribution between January 1 and the tax filing deadline, you must specify to the custodian whether the contribution is for the current year (2023) or the prior year (2022).

To contribute to any IRA, an individual or their spouse must have taxable compensation. This includes income from wages, salaries, commissions, self-employment, and certain types of alimony. Income from sources like investments or pensions does not qualify as compensation for IRA contribution purposes.

Traditional IRA Contribution and Deduction Rules for 2022

For the 2022 tax year, rules for a Traditional IRA govern how much you can contribute and deduct from your taxable income. The maximum contribution limit for 2022 was $6,000. Individuals age 50 or over by the end of the year were permitted to make an additional “catch-up” contribution of $1,000, for a total of $7,000.

Not Covered by a Workplace Retirement Plan

Deducting Traditional IRA contributions is straightforward for those not covered by a retirement plan at work, like a 401(k). If neither you nor your spouse is covered by a workplace plan, you can deduct the full amount of your contribution, up to the annual limit, regardless of your income. The deduction is claimed on your Form 1040 tax return.

Covered by a Workplace Retirement Plan

If you are covered by a retirement plan at work, your ability to deduct contributions depends on your modified adjusted gross income (MAGI) and filing status. You are considered covered if the “Retirement plan” box on your Form W-2 is checked. For 2022, the deduction was phased out based on the following MAGI ranges.

For single or head of household filers, the phase-out range was $68,000 to $78,000. For those married filing jointly or a qualifying widow(er), the range was $109,000 to $129,000. If your MAGI was below the range, you could take a full deduction, and if it was within the range, you could take a partial deduction. No deduction was allowed if your MAGI was above the range.

For married individuals filing separately, the phase-out range was $0 to $10,000, which eliminates the deduction for most who use this filing status.

Spouse is Covered by a Workplace Retirement Plan

Different rules apply if you are not covered by a workplace retirement plan, but your spouse is. Your deduction is based on your joint MAGI. For 2022, the deduction phased out for a combined MAGI between $204,000 and $214,000. If your joint MAGI was below this range, you could take a full deduction, while a partial deduction was permitted for a MAGI within the range. No deduction was allowed if your MAGI was above $214,000.

If your income is too high for a deductible contribution, you can still make a nondeductible contribution to a Traditional IRA. While there is no immediate tax deduction, earnings grow tax-deferred. You must track these contributions by filing IRS Form 8606, Nondeductible IRAs, to prevent that portion from being taxed upon withdrawal.

Roth IRA Contribution Rules for 2022

Roth IRA contributions are not tax-deductible, as their primary tax advantage is tax-free qualified distributions in retirement. The 2022 contribution limits for Roth IRAs are the same as for Traditional IRAs, and this limit applies to the total contributions made to all your IRAs combined. Your ability to contribute to a Roth IRA is determined by your modified adjusted gross income (MAGI).

For 2022, the MAGI phase-out ranges determined your eligibility. For single or head of household filers, the range was $129,000 to $144,000. For those married filing jointly or qualifying widow(er)s, the range was $204,000 to $214,000. If your MAGI was below the range you could make a full contribution, and if it was within the range, your contribution was limited.

You could not contribute if your MAGI was above the range. For married individuals filing separately who lived with their spouse, the phase-out range was $0 to $10,000, making most in this category ineligible.

Rollovers and Roth Conversions

IRS rules govern moving retirement funds between accounts through rollovers and conversions. A rollover moves funds from one retirement account to another, such as from a 401(k) to an IRA. A Roth conversion is a transaction where you move funds from a pre-tax retirement account, like a Traditional IRA, into a post-tax Roth IRA.

Rollovers

A rollover can be direct or indirect. In a direct rollover, funds are transferred between financial institutions, and no taxes are withheld. In an indirect rollover, the funds are paid to you, and you have 60 days to deposit them into another retirement account.

If you perform an indirect rollover from an employer plan like a 401(k), the administrator must withhold 20% for federal taxes. To complete a full rollover, you must use your own funds to replace the 20% that was withheld. Missing the 60-day deadline results in the distribution being treated as taxable income and may incur a 10% early withdrawal penalty if you are under age 59 ½. The IRS limits taxpayers to one indirect IRA-to-IRA rollover per 12-month period.

Roth Conversions

A Roth conversion moves assets from a pre-tax retirement account, like a Traditional IRA or 401(k), into a post-tax Roth IRA. The amount you convert is included in your taxable income for the year of the conversion and is taxed as ordinary income. Once the funds are in the Roth IRA, they grow tax-free, and qualified withdrawals in retirement are also tax-free. A five-year holding period applies to converted funds; withdrawing them before this period and before age 59 ½ can result in a 10% penalty.

Correcting Excess Contributions

An excess contribution occurs if you contribute more than the annual limit, contribute without enough taxable compensation, or make an ineligible Roth IRA contribution. These are subject to a 6% excise tax for each year they remain in the account, calculated on Form 5329.

To avoid the penalty, you can withdraw the excess amount and any earnings it generated before your tax return due date, including extensions. For a 2022 excess contribution, this deadline was October 15, 2023, with an extension. Withdrawing the excess and its earnings by the deadline avoids the 6% tax.

The withdrawn earnings must be reported as taxable income for the year the excess contribution was made. Under the SECURE 2.0 Act, the 10% early withdrawal penalty on these earnings was eliminated for corrective distributions made after December 28, 2022.

Another method is to apply the excess contribution to a future year’s limit. For example, a $1,000 excess for 2022 could be applied to your 2023 limit if you reduce your 2023 contribution accordingly. However, you would still owe the 6% excise tax on the $1,000 for the 2022 tax year.