There are two main tax advantages for retirement savers who open a traditional IRA. First, until it’s time to take withdrawals during your retirement years, your investments grow tax-free. The second benefit is taken at tax time. You can reduce your tax obligation by deducting all or part of your traditional IRA contributions from your income.
However, not all traditional IRA contributors are eligible to receive this one-time tax benefit. High earners and workers who are enrolled in an employer-sponsored retirement plan are subject to income thresholds.
Keywords: IRA contribution limits, IRA income limits, IRA eligibility, IRA types, IRA contribution deadlines, IRA tax benefits, IRA withdrawal rules, IRA planning strategies, IRA FAQs.
Individual Retirement Accounts (IRAs) are powerful financial tools that offer significant tax advantages for retirement savings. Understanding the contribution and income limits for IRAs in 2020 and 2021 is crucial for maximizing your retirement savings potential. This guide provides a comprehensive overview of IRA contribution limits, income limits, eligibility requirements, and key considerations for both Traditional and Roth IRAs.
IRA Contribution Limits:
The annual contribution limit for all IRAs, including both Traditional and Roth IRAs, is $6,000 for individuals under age 50 and $7,000 for those aged 50 and over in both 2020 and 2021. This limit applies to the total contributions made to all your IRA accounts, regardless of the type.
IRA Income Limits:
Traditional IRA:
- 2020: You can deduct your full Traditional IRA contribution if your modified adjusted gross income (MAGI) is below $65,000 for single filers or $104,000 for married couples filing jointly. The deduction is phased out for MAGIs between $65,000-$75,000 for single filers and $104,000-$124,000 for married couples filing jointly.
- 2021: You can deduct your full Traditional IRA contribution if your MAGI is below $66,000 for single filers or $105,000 for married couples filing jointly. The deduction is phased out for MAGIs between $66,000-$76,000 for single filers and $105,000-$125,000 for married couples filing jointly.
Roth IRA:
- 2020: You can contribute to a Roth IRA if your MAGI is below $124,000 for single filers or $196,000 for married couples filing jointly. The contribution limit is phased out for MAGIs between $124,000-$139,000 for single filers and $196,000-$206,000 for married couples filing jointly.
- 2021: You can contribute to a Roth IRA if your MAGI is below $125,000 for single filers or $198,000 for married couples filing jointly. The contribution limit is phased out for MAGIs between $125,000-$140,000 for single filers and $198,000-$208,000 for married couples filing jointly.
IRA Contribution Deadlines:
- 2020: You can contribute to your IRA for the 2020 tax year until April 15, 2021.
- 2021: You can contribute to your IRA for the 2021 tax year until April 15, 2022.
IRA Types and Tax Benefits:
Traditional IRA:
- Contributions may be tax-deductible, depending on your income.
- Earnings grow tax-deferred.
- Withdrawals are taxed as ordinary income in retirement.
Roth IRA:
- Contributions are not tax-deductible.
- Earnings grow tax-free.
- Qualified withdrawals are tax-free in retirement.
IRA Withdrawal Rules:
- Traditional IRA: Generally, withdrawals before age 59 1/2 are subject to a 10% penalty, as well as your usual tax rate. However, there are exceptions for certain hardship withdrawals and qualified education expenses.
- Roth IRA: Qualified withdrawals of contributions are always tax-free and penalty-free. However, earnings may be subject to a 10% penalty if withdrawn before age 59 1/2, unless an exception applies.
IRA Planning Strategies:
- Maximize contributions: Contribute as much as you can afford to your IRA each year to maximize your retirement savings.
- Choose the right IRA type: Consider your current income and future tax goals when choosing between a Traditional or Roth IRA.
- Rebalance your portfolio: Regularly review and adjust your IRA investments to maintain a balanced and diversified portfolio.
- Seek professional advice: Consult with a financial advisor to develop a personalized IRA strategy that aligns with your financial goals and risk tolerance.
IRA FAQs:
Q: Can I contribute to an IRA if I don’t have earned income?
A: Yes, you can contribute to an IRA if your spouse has earned income. However, the total contributions cannot exceed the total earned income of both spouses.
Q: What happens to my IRA if I change jobs?
A: You can roll over your IRA assets from one custodian to another without incurring any tax penalties.
Q: What are the risks of investing in an IRA?
A: Like any investment, IRAs carry investment risks. The value of your IRA investments can fluctuate, and you could lose money.
IRAs offer a valuable opportunity to save for retirement with significant tax benefits. Understanding the contribution limits, income limits, and different IRA types is crucial for making informed decisions about your retirement savings strategy. By maximizing your contributions, choosing the right IRA type, and managing your investments wisely, you can build a secure financial future for yourself.
Spousal IRA Contribution
Even in cases where one spouse is unemployed or has very little qualifying income, a spousal IRA enables both spouses to optimize their traditional IRA contributions. A spousal IRA contribution can only be made if both IRAs are kept as separate accounts—they cannot be held jointly.
In addition, the couple must file a joint tax return. The lesser of $13,000 (or $15,000 if both spouses are 50 years of age or older) and your entire taxable income for the year 2023 will be your combined contribution. In 2024, that amount increases to $14,000 (or $16,000 if both spouses are 50 years of age or older).
Age Restrictions
The age limit on traditional IRA contributions was removed by the Setting Every Community Up for Retirement Enhancement (SECURE) Act, and it will take effect in 2020. Put another way, you can make contributions to your IRA as long as you receive money from your job. Individuals 70½ years of age or older were prohibited from contributing to traditional IRAs starting in 2019.