An IRA, or individual retirement account, is a tax-advantaged investment account designed to help you save for retirement. It’s a great way to beef up your nest egg, whether you’re working for a company that doesn’t offer a 401(k) or you’re just looking for more ways to save. In the case of a traditional IRA — the focus of this article — you’ll also get a nice tax break on your contributions.
However, you can’t contribute an unlimited amount of money to your IRA. Like other types of retirement accounts, traditional IRAs are governed by contribution limits set by the IRS. For 2019, that limit is $6,000 per year (or $7,000 for those age 50 or older, who get an extra $1,000 in catch-up contributions).
Depending on your circumstances, your contributions may not be eligible for full tax-deductible status. And your individual contribution limit may be lower than the standard $6,000 if you earn a high income or have a retirement account through your employer.
If you’re asking yourself “How much can I contribute to my IRA?” keep reading to learn all about the ins and outs of traditional IRA contributions.
Tax benefits of a traditional IRA
So how does a traditional IRA offer tax benefits in the first place?
For the majority of earners, money contributed to a traditional IRA doesn’t count toward annual income, meaning you don’t have to pay income taxes on it. However, this tax break does come with a trade-off: When it comes time to take distributions or withdrawals from your traditional IRA, you’ll have to pay taxes on the full amount, including growth earnings. This differs from a Roth IRA, in which your contributions are taxable today but grow tax-deferred and can be withdrawn tax-free later.
Whether a Roth or traditional IRA is right for you depends on a variety of factors, including what you expect your income tax bracket to be when you retire. For more information on how to decide between the two, check out this guide to choosing the right IRA.
Where to open an IRA
If you do decide to open an IRA — whether Roth or traditional — you’ll have lots of provider options to choose from. These common retirement vehicles are available through a variety of financial firms, including nationwide banks like Chase, brokerages like TD Ameritrade and even some mobile investing apps like Stash.
However, different companies will charge different fees to open and maintain an IRA — and those are on top of any fees associated with trades and commissions. You also may be required to make a minimum initial deposit, which may be out of reach if you don’t have much to put toward investments right now.
Deciding which IRA provider is right for you depends on how much guidance you want and how much you’re willing to pay for it.
Tax-deductible phase-out limits for traditional IRA contributions in 2019
Although anyone under the age of 70 and a half can contribute to a traditional IRA — as long as they’ve earned taxable income in the year they wish to make the contribution — they may or may not receive the full tax benefit. For example, if you earn more than a certain income threshold or are covered by an employer-sponsored retirement plan, your contribution limit and tax deduction eligibility may be lowered.
|2019 Tax-Deductible Phase-Out Limits for Traditional IRA Contributions|
Tax Deduction Eligibility
|Single or head of household covered by a work retirement account|
|Single or head of household not covered by a work retirement account|
|Married filing jointly or qualified widowers covered by a work retirement account|
|Married filing jointly or separately with a spouse who is not covered by a work retirement account|
|Married filing jointly with a spouse who is covered by a work retirement account|
|Married but filing separately, whether or not one spouse is covered by a work retirement account|
How to calculate your phase-out contribution amount
Even if your circumstances make you ineligible to deduct the full amount of your IRA contribution, you can put some money in the account, just not the $6,000 maximum. You can calculate your phase-out contribution amount — or the total tax-deductible amount you’re eligible to contribute to your IRA — by using an IRA contribution calculator.
What if you make too much to contribute to an IRA?
If you earn too much money to qualify for a traditional, tax-deductible IRA, there are plenty of retirement vehicles available to choose from, which may include:
- A 401(k) or 403(b). These are employer-sponsored accounts that carry an overall contribution maximum of $56,000 or 100% of employee compensation, whichever is lower, for 2019.
- A SEP IRA. An employer can contribute the lesser of $56,000 or 25% of employee compensation for 2019. The same limits apply to contributions if you are self-employed, but certain rules apply regarding the maximum deductible contribution.
- A Roth IRA. This account carries the same contribution limits as a traditional IRA ($6,000 for 2019), but you’ll pay income taxes ahead of time, so you won’t run into this particular tax problem.
Unfortunately, not everybody can open and contribute directly to a Roth IRA. Your eligibility for this type of account is based on your income. If you make more than the designated income threshold, however, you can pursue a “backdoor Roth,” where you transfer assets from a traditional IRA to a Roth in order to reap its unique suite of benefits.
What happens if you contribute too much to your IRA?
IRAs have relatively low contribution limits, which means overcontributing is an easy mistake to make, especially if you’re contributing to multiple IRAs at the same time.
Although saving too much for retirement might not sound like a problem, the IRS has regulations and penalties that make going over the limit unattractive. Any excess contributions made to your traditional IRA will be subject to a 6% tax (on top of what you’ll pay when you eventually withdraw the money) not just for the year you went over the limit but for every year the excess money remains in the account.
Fortunately, if you recognize the error quickly enough, you can withdraw the excess money without paying a penalty — as long as you do so before you file your tax return. If you’re too late, it may be possible to file for an extension on your return or apply the contributions to the following tax year. However, if you do so, you’ll need to ensure you adjust next year’s contribution total so you don’t run into the same problem again.
Bottom line: how much can you contribute to a traditional IRA?
The maximum contribution limit for a traditional IRA is $6,000 for 2019 (or $7,000 if you’re age 50 or older). However, specific financial circumstances, such as having retirement coverage through an employer or earning above a certain income threshold, could lower your deductible limit.
If you overcontribute to an IRA, you’ll be subject to a recurrent 6% tax on the excess amount, but you can avoid that penalty if you withdraw the funds before filing your return or by applying them to the following taxable year (and adjusting that year’s contributions accordingly).