The 2024 federal filing season is in full swing with many individuals including federal employees and retirees preparing their 2023 federal income tax returns. For individual income tax return filers, that deadline is April 15, 2024. With the deadline less than two months away, federal employees not only have a deadline to file their 2023 federal income tax returns, but they also have the same deadline to make their 2023 IRA contributions.

While April 15, 2024 is the deadline for filing 2023 federal income tax returns, individuals may request a six-month filing extension, with a due date of Oct. 15, 2024 for filing 2023 tax returns. However, the deadline for making 2023 IRA contributions is April 15, 2024, even if a filing extension is requested.

SEE ALSO:

• 2024 Maximum Contribution Limits
• 10 Costly TSP and IRA Rollover Errors Federal Employees and Retirees Should Avoid

IRS rules allow IRA custodians to accept 2023 IRA contributions after April 15, 2024 if the contributions are mailed with a postmark of April 15, 2024, or earlier. This is true even if the contribution does not reach the IRA custodian until after the deadline has passed. IRA owners are advised to clearly indicate to their IRA custodians that their contributions are for tax year 2023 and not for tax year 2024. Failing to indicate that it is a 2023 IRA contribution may result in the IRA custodian reporting the IRA contribution as a 2024 IRA contribution. That could cause tax problems for the IRA owner.

Different Types of IRAs and Eligibility Rules for Making 2023 IRA Contributions

There are three types of IRAs available to federal employees and their spouses to make their 2023 IRA contributions.

They are:

(1) Deductible traditional IRAs;

(2) Nondeductible traditional IRAs; and

(3) Roth IRAs.

Since federal employees are covered by a pension plan (CSRS or FERS) and they contribute to the Thrift Savings Plan (TSP), and most federal employee adjusted gross incomes are above the limits for contributing to a deductible traditional IRA, most federal employees are not eligible to contribute to a deductible traditional IRA. Therefore, only a nondeductible traditional IRA and a Roth IRA are discussed.

Maximum IRA Contribution

The maximum IRA contribution for 2023 is the lower of:

(1) An individual’s earned income and

(2) $6,500 per individual for individuals younger than age 50 as of December 31, 2023; and $7,500 for individuals over age 49 as of December 31, 2023. For married individuals, both spouses can contribute the maximum to an IRA even if only one spouse has earned income – wages/salary or self-employment income with a net profit.

Nondeductible Traditional IRAs

Any individual with earned income – no matter their age or the amount of their adjusted gross income – can contribute to a nondeductible traditional IRA. With a nondeductible traditional IRA, there are no tax benefits when contributing because after-taxed dollars are used to contribute. The advantage of the nondeductible traditional IRA is that any earnings that accrue within the IRA will not be taxed until the earnings are withdrawn after the IRA owner becomes age 59.5.

Note that contributions made to the nondeductible traditional IRA will not be taxed when withdrawn because these same contributions were made with after-taxed dollars. To make sure the IRS does not tax contributions to a nondeductible traditional IRA when they are withdrawn, the IRA owner must report their nondeductible traditional IRA contributions on IRS Form 8606 (Nondeductible IRAs) for any year contributions are made to a nondeductible traditional IRA.

Form 8606 is filed with one’s federal income tax return in any year the individual contributes to a nondeductible traditional IRA. If the individual has already filed his or her income tax return, then Form 8606 can be filed by itself with no penalty. Therefore, any federal employee who has already filed his or her 2023 federal income tax return and contributed to a nondeductible traditional IRA during 2023 should report their contribution on 2023 Form 8606. They need to file the form separately with no penalty.

Roth IRAs

With a Roth IRA, there is no paperwork (that is, no IRS forms) that has to be filed when an individual contributes to Roth IRA. Roth IRAs are beneficial because while there are no tax benefits when contributing to a Roth IRA, all qualified distributions from a Roth IRA are completely tax-free.

All contributions are made with after-taxed dollars and earnings accrue tax-free if certain conditions are met. The only limitation associated with contributing to a Roth IRA is that there are modified adjusted gross income (MAGI) limitations for contributing to a Roth IRA.

These MAGI contribution limitations for 2023 are presented in Table 1:

Table 1. 2023 Roth IRA Modified Adjusted Gross Income (MAGI) Contribution Limitations

*See Worksheet 1 below for calculation of modified AGI.**See Worksheet 2 below to determine the reduced contribution amount.

Worksheet 1. Modified Adjusted Gross Income (MAGI) for Roth IRA Contribution Purposes
Worksheet 2. Reduced 2023 Roth IRA Contributions Based on 2023 Modified AGI (MAGI)

Any federal employee who previously contributed to a Roth IRA during calendar year 2023 but now discovers (due to higher-than-expected MAGI) that he or she is not eligible to contribute to a Roth IRA for the year, can recharacterize their Roth IRA contribution to a “nondeductible” traditional IRA. The employee has until October 15,2024 to do so. To recharacterize the Roth IRA contribution, the Roth IRA owner must contact the Roth IRA custodian to remove the contribution and accrued earnings and to directly transfer the contributions to a nondeductible traditional IRA.

The following two examples illustrate:

Example 1. Paul is a single federal employee aged 47 and whose 2023 modified AGI is $141,500. Paul intends to contribute to his Roth IRA for the year 2023 before the April 15,2024 deadline. The maximum that Paul may contribute to his Roth IRA is $6,500. However, because Paul’s modified AGI is over $138,000 but less than $153,000, his Roth IRA contribution will be limited. According to Worksheet 2 above, Paul’s 2023 Roth IRA contribution is limited to $4,225. He can contribute the $4,225 to his Roth IRA and he can contribute the remaining $2,275 to a nondeductible traditional IRA for the year 2023. If he does make the contribution to a “nondeductible” traditional IRA, then he must report the $2,275 contribution to the nondeductible traditional IRA on 2023 IRS Form 8606.

Example 2. Helen, age 57 is a married federal employee. Her spouse Howard, age 58, is not a federal employee. Helen’s and Howard’s modified AGI for the year 2023 is $265,000 which exceeds the modified AGI limit of $238,000 for married individuals filing jointly contributing to a Roth IRA for the year 2023. Neither Helen nor Howard can contribute to their Roth IRAs for 2023. However, both Helen and Howard can each contribute a maximum $7,500 contribution to their own nondeductible traditional IRAs for the year 2023. If they make their contributions to their own nondeductible traditional IRAs for the year 2023 (before April 15, 2024), they each must report their contributions on their respective 2023 IRS Form 8606.

October 15,2024 is also the deadline to remove any excess contributions to an IRA for the year 2023 (that is, contributions exceeding $6,500 for individuals younger than 50 as of December 31,2023, and exceeding $7,500 for individuals over age 49 as of December 31, 2023. If the excess contributions are not removed by October 15, 2024, then the IRS will impose a 6 percent excess contribution penalty on the IRA owner. If the October 15,2024 deadline is missed, the 6% penalty will continue to apply for each year the excess contributions remain in the IRA.