The Individual Retirement Account (IRA) is the cornerstone of retirement planning. Unfortunately, many musicians miss opportunities to fund an IRA because they don’t realize they are eligible. With the great tax benefits of IRAs, consider funding yours every year you can. Here are seven situations where many musicians don’t realize they could fund an IRA.
IRAs for Musicians
1. Spousal IRA. Even if a spouse does not have any earned income, they are eligible to make a Traditional or Roth IRA contribution based on the household income. Generally, if one spouse is eligible for a Roth IRA, so is the other spouse. In some cases, a spouse may be eligible for a Traditional IRA contribution even when their spouse is ineligible because they are covered by an employer plan. This is helpful if one spouse is a stay-at-home parent or in school.
2. No employer sponsored retirement plan. If you are single and your employer does not offer a retirement plan then there are NO income limits on a Traditional IRA. Same, if you are married and neither are covered at work. If you are a self-employed musician, start with a Traditional or Roth IRA.
(Eligibility means your employer offers a plan and you are eligible. If you choose not to participate, then you are considered covered by an employer plan, which is number 2:)
3. Covered by a employer plan. Here’s where things get tricky. Anyone with earned income can make a Traditional IRA contribution, but there are rules about who can deduct their contribution. A tax-deductible contribution to your Traditional IRA is greatly preferred over a non-deductible contribution. Never do a non-deductible contribution if you are eligible for a Roth IRA. Always choose the Roth over non-deductible. The income limits listed below do not mean you cannot do a Traditional IRA, only that you cannot deduct the contributions.
If you are covered by an employer plan, including a 401(k), 403(b), SIMPLE IRA, pension, etc., you are still eligible for a Traditional IRA if your Modified Adjusted Gross Income (MAGI) is below these levels for 2018:
- Single: $63,000
- Married filing jointly: $101,000 if you are covered by an employer plan
- Married filing jointly: $189,000 if your spouse is covered at work but you are not (this second one is missed very frequently!)
Your Modified Adjusted Gross Income cannot be precisely determined until you are doing your taxes. Sometimes, there are musicians who assume they are not eligible based on their gross income, but would be eligible if they look at their MAGI.
Roth IRA Rules
4. Roth IRA. The Roth IRA has different income limits than the Traditional IRA, and these limits apply regardless of whether you are covered by an employer retirement plan or not. (2018 figures below.) If you don’t need a tax deduction for this year and are eligible for both the Traditional and Roth, go for the Roth.
- Single: $120,000
- Married filing jointly: $189,000
5. Back-door Roth IRA. Do you make too much to contribute to a Roth IRA? If you do not have any Traditional IRAs, you might be able to do a “Back-Door Roth IRA”. It’s a two step process of funding a non-deductible Traditional IRA and then doing a Roth Conversion. We’ve written about the Back Door Roth several times, including here.
SEP IRAs for Musicians
6. Self-Employed. If you have any self-employment income, or receive a 1099 as an “independent contractor”, you may be eligible for a SEP-IRA. This is on top of any 401(k) or other IRAs that you fund. It is possible, for example, that you could put $18,500 into a 403(b) at a University job, contribute $5,500 into a Roth IRA, and still contribute to a SEP-IRA for self-employed gigs.
There are no income limits to a SEP contribution, but it is difficult to know how much you can contribute until you do your tax return. The basic formula is that you can contribute up to 20% of your net income, after you subtract your business expenses and one-half of the self-employment tax. The maximum contribution to a SEP is $55,000 for 2018. With such high limits, the SEP is one of the best IRAs for Musicians who are looking to save more than the $5,500 limit to a Traditional or Roth IRA.
Learn more about the SEP-IRA.
7. Tax Extension. For the Traditional and Roth IRA, you have to make your contribution by April 15 of the following year. If you do a tax extension, that’s fine, but the IRA contributions are still due by April 15. However, the SEP IRA is the only IRA where you can make a contribution all the way until October 15, when you file an extension.
A few notes: For 2018, contribution limits for Roth and Traditional IRAs are $5,500 or $6,500 if over age 50. For 2019, this has been increased to $6,000 and $7,000. You become eligible for the catch-up contribution in the year you turn 50. Even if your birthday is December 31, you are considered 50 for the whole year. Most of these income limits have a phase-out, and I’ve listed the lowest level. If your income is slightly above the limit, you may be eligible for a reduced contribution.
Retirement Planning is our focus, so we welcome your questions! IRAs for Musicians are the cornerstone of our practice. Most musicians are responsible for funding their own retirement and we want to see you succeed. Be sure you don’t miss an opportunity to fund an IRA each and every year that you are eligible.