A Guide to IRA Contribution Limits
One of the most popular and powerful retirement planning tools available to employed workers, self-employed business owners, contract workers is an Individual Retirement Account (IRA). As these accounts offer extensive benefits and tax relief to investors, there are IRS-imposed limits on how much you can contribute to your account annually. Knowledge of the maximum traditional IRA contribution limits empowers investors to make informed decisions when planning for their futures.
What is an IRA?
An IRA is an investment account offering tax-advantaged retirement planning to investors. IRAs are comprised of a variety of investment mediums, including, but not limited to stocks, bonds, ETFs, and real estate. For those familiar with 401(K)s, IRAs are similar in nature but are not sponsored by employers, making them available to people without traditional employment or employees who work for companies that don’t offer retirement benefits.
IRAs come in multiple types, with the two most popular being traditional IRAs and Roth IRAs. Traditional IRAs allow many investors to deduct part or all of their annual contribution to their IRA from their income taxes, lowering their current tax burden. They will still have to pay taxes on the account, but not until they withdraw the money during retirement. For many, their annual income at retirement will be much lower, offering significant tax savings. Roth IRAs, on the other hand, are taxed immediately but withdrawals during retirement are tax-free outside of earnings. For those expecting higher income at retirement, this can be advantageous.
When determining how much money you need to have in your IRA upon retirement, you’ll need to factor in a multitude of different figures. Most importantly, you’ll want to consider when you’re planning on retiring, the type of lifestyle you’d like when you finish working, any later-life expenses like healthcare you’ll incur and what other income streams and government assistance might be available to you. Consulting a professional is the best way to get a more reliable answer, but you can get a good idea of what you’re looking for with a retirement savings calculator.
Traditional IRA contribution limits
The IRS sets out annual limits every year on how much you are able to contribute to your retirement accounts. Traditional IRA contribution limits are dependent on your age, your marital status, and your income if you made under the maximum contribution limits.
|Status||Max. Annual Contribution|
|Single, Under 50 Years Old||$6,000|
|Single, Over 50 Years Old||$7,000|
|Married, Under 50 Years Old||$12,000|
|Married, Over 50 Years Old||$14,000|
For single people under the age of 50 years old, the maximum traditional IRA contribution limit for 2020 is $6,000. When you’re over the age of 50, the IRS lets you make an additional contribution of $1,000 known as a catch-up amount. Even if you’re not “behind” on your retirement planning, you’re still able to make this additional contribution.
The exception to all of these maximums is if you made less than the contribution maximum for the year. For example, if you only made $1,500 in income for the year, your maximum contribution is $1,500.
For married couples, the contribution maximums are the same as they are for single filers except doubled because there are two people. What happens if one of the married parties didn’t work? It does not matter. Each spouse is able to contribute up to the individual maximum into their individual IRA. For example, if a married individual under 50 years of age made $100,000 for the year and their partner made $0 in income, both individuals would be able to contribute up to $6,000 annually into their respective IRA accounts.
It’s important to point out that these traditional IRA contribution limits are not required amounts to participate. If you’re only able to contribute a smaller amount of money to your retirement account for that year, that’s OK. Don’t be deterred from investing in your retirement future because you’re not able to put in the maximum amount. Industry experts push the maximums because of the tax benefits, but that’s only for those in a financial position to do so.
For those with multiple IRAs, these maximums are for the sum of all your accounts, not per account. These limits also do not apply to rollover investments (payments you’re receiving from your retirement account) or qualified reservist repayments, which are payments for reserve-components of the armed forces called to active duty.
You’re able to continue contributing to a traditional IRA all the way up until the age of 70 ½. After that, you’re only able to contribute rollover contributions. Roth IRAs, on the other hand, allow you to continue contributing regardless of your age.
Once you have a firm understanding of the traditional IRA contribution limits, you’ll want to look into the tax benefits associated with each filing situation. Depending on your tax filing status, if you’re covered by an employer-sponsored retirement program and your modified adjusted gross income, you will be able to deduct different amounts of your IRA contribution from your taxes. As there are several different classifications you can fall under, the IRS deductions limit page is your best resource for your specific situation outside of seeking professional advice.
The final word
The fact you’re looking into the maximum you’re able to invest in your retirement already shows you’ve got your head in the right place about the future. Once you’ve got a firm understanding of what you are able to do with IRAs, set out a plan to begin contributing that works with your goals. Remember, there’s no requirement that you have to contribute the maximum to your retirement account. Even small contributions now can begin to build an impressive retirement portfolio for the future. With proper planning and disciplined investing through tools like IRAs, retirement can be as joyous as it’s supposed to be.