Q.   My husband and I usually contribute the maximum to our Roth IRAs but we skipped last year since we are both unsure of our incomes in this environment. We have received some pay, some unemployment benefits, the stimulus checks and we know we are in much better shape than others about whom we have read about.  We have a total of $4,000 we are prepared to contribute for 2020 but we’d like to contribute the full $6,000 for each of us. We have both just been called back to work full-time and we think we will have the additional $8,000 by the end of April (unless another wave of the virus hits and puts us again out of work.  We do have $8,500 in savings but that is our emergency fund.  Since retirement is probably fifteen to twenty years away, we really don’t want to raid our emergency fund just to make the full contributions to our IRA.  We think we’d be better off skipping a year, do you agree?

A.  You don’t state your ages but regardless of your age you are to be admired.  Not only for your forward thinking about retirement but for also having an emergency fund!  In addition to your money savvy mindset, you have a couple of things working in your favor.  

Roth IRAs are a great retirement savings tool. They are funded with after tax dollars, grow tax deferred and earnings and contributions can be withdrawn tax and penalty free once the owner reaches age 59 ½.  There are some exceptions where earnings can be withdrawn tax and penalty free prior to age 59 ½ but contributions may always be withdrawn without taxation or penalty.  If you are under age 50 the maximum contribution to a Roth IRA for tax year 2020 is $6,000 or earned income whichever is less.  For those age 50 and over the maximum is the lessor of $7,000 or earned income.  The maximum contribution is allowed as long as your modified gross income (MAGI) is $196,000 or less if married filing jointly or $124,000 or less if filing single or head of household. The allowed contribution is phased out for MAGI’s exceeding these amounts. 

Since contributions can be withdrawn at any time, for any reason without penalty you could fully fund your Roth IRAs for 2020 with the money in your emergency fund.  Money contributed to a Roth IRA can be invested in a variety of ways including but not limited to:  stocks, bonds, mutual funds, certificates of deposit, money markets, savings accounts, structured products and annuities.  If you are using your emergency fund, contribute the maximum allowed to your Roth IRA but keep it “invested” in a cash equivalent such as a money market account until you build back your emergency fund/savings. This will allow you to access the Roth IRA money without any market risk if needed just as if it was in your current savings account.  Once you have reestablished your emergency fund you can then move the monies in your Roth IRA into more aggressive investments with greater potential for growth.  

With that said, you may not even have to rob your emergency fund since you may have the money needed to fund your Roth IRAs in time to make your 2020 contributions.  On March 17, 2020 the IRS extended the 2020 federal income tax filing deadline to May 17, 2021. This extension also applies to the 2020 IRA contribution deadline.  So, you have more time to gather the funds needed to make your full contribution!  If you live in Oklahoma, Louisiana or Texas the federal tax deadline and therefore the contribution deadline, is June 15th. An extension to file your taxes beyond these deadlines does not extend the deadline for IRA contributions. 

When making your contribution indicate that this is for tax year 2020 or the custodian may code it as a 2021 contribution. 

Article contributed by Holly Nicholson, CFP, JD, a successful financial planning column writer with 30 years experience in planning, estate, and taxes.