2021 IRA Limit, Recharacterizations, Conversion Deciphering

Overall Contribution Limit for Traditional and Roth IRAs

If you aren’t married filing jointly, your limit on contributions to traditional and Roth IRAs is generally the smaller of $6,000 ($7,000 if age 50 or older at the end of 2021) or your taxable compensation (defined below). If you are married filing jointly, your contribution limit is generally $6,000 ($7,000 if age 50 or older at the end of 2021) and your spouse's contribution limit is $6,000 ($7,000 if age 50 or older at the end of 2021) as well. But if the combined taxable compensation of both you and your spouse is less than $12,000 ($13,000 if one spouse is age 50 or older at the end of 2021; $14,000 if both spouses are age 50 or older at the end of 2021), see Kay Bailey Hutchison Spousal IRA Limit in Pub. 590-A for special rules. This limit doesn’t apply to employer contributions to a SEP or SIMPLE IRA. Note. Rollovers, Roth IRA conversions, Roth IRA rollovers from qualified retirement plans, and repayments of qualified disaster distributions and qualified reservist distributions don’t affect your contribution limit. The amount you can contribute to a Roth IRA may also be limited by your modified AGI (see Contributions, earlier, and the Maximum Roth IRA Contribution Worksheet).

Difficulty of care payments.

For contributions after December 20, 2019, you may elect to increase the nondeductible IRA contribution limit by some or all of the amount of difficulty of care payments, which are a type of qualified foster care payment, received. For details, see 2021 Pub. 590-A.

Taxable compensation.

Taxable compensation includes the following.

• Wages, salaries, tips, etc. If you received a distribution from a nonqualified deferred compensation plan or nongovernmental section 457 plan that is included in Form W-2, box 1, or in Form 1099-NEC, box 1, don’t include that distribution in taxable compensation. The distribution should CAUTION ! be shown in (a) Form W-2, box 11; (b) Form W-2, box 12, with code Z; or (c) Form 1099-MISC, box 14. If it isn’t, contact your employer for the amount of the distribution.

• Nontaxable combat pay if you were a member of the U.S. Armed Forces.

• Self-employment income. If you are self-employed (a sole proprietor or a partner), taxable compensation is your net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by your deduction for contributions made on your behalf to retirement plans and the deductible part of your self-employment tax.

• Alimony and separate maintenance pursuant to a divorce or separation agreement entered into before January 1, 2019; unless that agreement was changed after December 31, 2018, to expressly provide that alimony received isn't included in the recipient's income.

• Certain non-tuition fellowship and stipend payments for tax years beginning after December 31, 2019. For details, see Pub. 590-A.

Recharacterizations

Generally, you can recharacterize (correct) an IRA contribution by making a trustee-to-trustee transfer from one IRA to another type of IRA. Trustee-to-trustee transfers are made directly between financial institutions or within the same financial institution. You must generally make the transfer by the due date of your return (including extensions) and reflect it on your return. However, if you timely filed your return without making the transfer, you can make the transfer within 6 months of the due date of your return, excluding extensions. If necessary, file an amended return reflecting the transfer (see Amending Form 8606, later). Write “Filed pursuant to section 301.9100-2” on the amended return.

No recharacterizations of conversions made in 2018 or later.

A conversion of a traditional IRA to a Roth IRA, and a rollover from any other eligible retirement plan to a Roth IRA, made in tax years beginning after December 31, 2017, cannot be recharacterized as having been made to a traditional IRA.

Reporting recharacterizations.

Treat any recharacterized IRA contribution as though the amount of the contribution was originally contributed to the second IRA, not the first IRA. For the recharacterization, you must transfer the amount of the original contribution plus any related earnings or less any related loss. In most cases, your IRA trustee or custodian figures the amount of the related earnings you must transfer. If you need to figure the related earnings, see How Do You Recharacterize a Contribution? in chapter 1 of Pub. 590-A. Treat any earnings or loss that occurred in the first IRA as having occurred in the second IRA. You can’t deduct any loss that occurred while the funds were in the first IRA. Also, you can’t take a deduction for a contribution to a traditional IRA if you later recharacterize the amount. The following discussion explains how to report the two different types of recharacterizations, including the statement that you must attach to your return explaining the recharacterization.

1. You made a contribution to a traditional IRA and later recharacterized part or all of it in a trustee-to-trustee transfer to a Roth IRA. If you recharacterized only part of the contribution, report the nondeductible traditional IRA portion of the remaining contribution, if any, on Form 8606, Part I. If you recharacterized the entire contribution, don’t report the contribution on Form 8606. In either case, attach a statement to your return explaining the recharacterization. If the recharacterization occurred in 2021, include the amount transferred from the traditional IRA on 2021 Form 1040, 1040-SR, or 1040-NR, line 4a. If the recharacterization occurred in 2022, report the amount transferred only in the attached statement, and not on your 2021 or 2022 tax return. See Example next.

Example. You are single, covered by an employer retirement plan, and you contributed $4,000 to a new traditional IRA on May 27, 2021. On February 24, 2022, you determine that your 2021 modified AGI will limit your traditional IRA deduction to $1,000. The value of your traditional IRA on that date is $4,400. In March 2022, you recharacterize $3,000 of the traditional IRA contribution as a Roth IRA contribution, and have $3,300 ($3,000 contribution plus $300 related earnings) transferred from your traditional IRA to a Roth IRA in a trustee-to-trustee transfer. You deduct the $1,000 traditional IRA contribution on your 2021 Form 1040. You don’t file a 2021 Form 8606. You attach a statement to your 2021 return explaining the recharacterization. The statement indicates that you contributed $4,000 to a traditional IRA on May 27, 2021; recharacterized $3,000 of that contribution on February 24, 2022, by transferring $3,000 plus $300 of related earnings from your traditional IRA to a Roth IRA in a trustee-to-trustee transfer; and deducted the remaining traditional IRA contribution of $1,000 on your 2021 Form 1040. You don’t report the $3,300 distribution from your traditional IRA on your 2021 Form 1040 because the distribution occurred in 2022. You don’t report the distribution on your 2022 Form 1040 because the recharacterization related to 2021 and was explained in an attachment to your 2021 return.

2. You made a contribution to a Roth IRA and later recharacterized part or all of it in a trustee-to-trustee transfer to a traditional IRA. Report the nondeductible traditional IRA portion of the recharacterized contribution, if any, on Form 8606, Part I. Don’t report the Roth IRA contribution (whether or not you recharacterized all or part of it) on Form 8606. Attach a statement to your return explaining the recharacterization. If the recharacterization occurred in 2021, include the amount transferred from the Roth IRA on your 2021 Form 1040, 1040-SR, or 1040-NR, line 4a. If the recharacterization occurred in 2022, report the amount transferred only in the attached statement, and not on your 2021 or 2022 tax return. See Example next.

Example. You are single, covered by an employer retirement plan, and you contributed $4,000 to a new Roth IRA on June 16, 2021. On December 29, 2021, you determine that your 2021 modified AGI will allow a full traditional IRA deduction. On that same date, you recharacterize the Roth IRA contribution as a traditional IRA contribution and have $4,200, the balance in the Roth IRA account ($4,000 contribution plus $200 related earnings), transferred from your Roth IRA to a traditional IRA in a trustee-to-trustee transfer. You deduct the $4,000 traditional IRA contribution on your 2021 Form 1040. You don’t file a Form 8606. You attach a statement to your return explaining the recharacterization. The statement indicates that you contributed $4,000 to a new Roth IRA on June 16, 2021; recharacterized that contribution on December 29, 2021, by transferring $4,200, the balance in the Roth IRA, to a traditional IRA in a trustee-to-trustee transfer; and deducted the traditional IRA contribution of $4,000 on your 2021 Form 1040. You include the $4,200 distribution from your Roth IRA on your 2021 Form 1040, line 4a.

Part II—2021 Conversions From Traditional, SEP, or SIMPLE IRAs to Roth IRAs

Complete Part II if you converted part or all of your traditional, SEP, or SIMPLE IRAs to a Roth IRA in 2021.

Line 16 If you didn’t complete line 8, see the instructions for that line. Then, enter on line 16 the amount you would have entered on line 8 had you completed it.

Line 17 If you didn’t complete line 11, enter on line 17 the amount from line 2 (or the amount you would have entered on line 2 if you had completed that line) plus any contributions included on line 1 that you made before the conversion.

Line 18 If your entry on line 18 is zero or less, don’t include the result on 2021 Form 1040, 1040-SR, or 1040-NR, line 4b. Include the full amount of the distribution on 2021 Form 1040, 1040-SR, or 1040-NR, line 4a.