With retirement on the horizon, an individual IRA is a planning resource you cannot ignore. Depending on the type of IRA, it provides individuals with tax breaks on deposits or withdrawals, as long as that money is not withdrawn til a certain age. Employees like you long to find the best IRA so they can set themselves up for financially stable retirements. Before you can select the best option, you need to understand how IRA contribution limits work. In this post, we will go over the basics in understanding individual IRA contribution limits.
Annual Contribution Limit
The IRS sets a limit on individual IRA contribution limits annually. In 2019, the maximum contribution was raised to $6,000 per year. If your gross taxable income is less than $6,000, then your contribution maxes out at that figure. You cannot contribute more than you make per year. Additionally, these contributions limits are shared among traditional and Roth IRAs. Employees succeed in saving for retirement when they figure out where to open Roth IRAs and keep the contribution limits in mind. If you possess both traditional and Roth IRAs, you will have to prioritize your share of savings among them. These are the basic contribution limits for both the traditional and Roth individual IRA.
Age Affects Contribution Limits
Since an individual IRA is intended for retirement, your age will actually affect your contribution limits. Up until 50 years of age, you are held to the 2019 standard contribution limit of $6,000. However, the IRS allows persons 50 and older to “catch-up” on their contributions by raising the limit to $7,000. Additionally, once you reach the ripe age of 70 1/2, you are no longer eligible to contribute to a traditional IRA. Taking age into account, your contribution limits may change twenty, ten, or five years down the line, depending on how old you are now.
Income Is Limiting
In some instances, your gross income can affect your maximum contribution. First and foremost, a traditional IRA is not limited by income; the following only applies to a Roth IRA. If you file for a single Roth IRA, your gross income must not exceed $122,000 to make a full contribution of $6,000 (or $7,000 if you are 50 or older). Between $122,000 and $136,999, your maximum contribution is a reduced figure. Greater than $137,000, your contribution limit will be zero dollars. Logistically speaking, you would want to contribute to a traditional IRA if your income will likely exceed $137,000. Keep these rules and your income in mind when setting up an individual IRA.
SEP And SIMPLE Options
Another major part of understanding individual IRA contribution limits is familiarizing yourself with SEP and SIMPLE options. Both options offer unique contribution limits. For instance, SEP IRAs only allow employers to contribute to their accounts. Self-employed individuals and small business owners can contribute a maximum of $56,000 a year. In contrast, both employers and employees can contribute to SIMPLE IRAs. Employees can contribute a maximum of $13,000 per year if they are under 50. Those over 50 can contribute $16,000. Employers can choose between contributing 2% of their net income and matching contributions up to 3%. Understand these unique IRAs to fully understand contribution limits.
Exceptions To IRA Contribution Limits
Finally, you need to learn about the exceptions to IRA contribution limits in order to gain a full understanding. More so, you need this knowledge to ensure that you follow the IRA rules and avoid conflict with the IRS. One of the main exceptions to individual IRA contribution limits is that you cannot contribute more capital than you make. Another exception affects nonworking spouses. If a nonworking individual’s spouse makes enough money to cover the contributions, they can have a spousal IRA. Professionals with nonworking spouses need to contribute double the amount that they would need to contribute if their spouse worked and had a different kind of IRA. By learning about the exceptions, you gain more knowledge about individual IRA contribution limits altogether.
Understanding an individual IRA is imperative to plan and save for your retirement. The IRS sets contribution limits annually. Recognize that both your income and your age play a role in your contribution limits. Review SEP and SIMPLE IRAs, paying special attention to their unique contribution limits. Finally, take note of the exceptions to IRA contribution limits to ensure that you set yourself up for a financially stable retirement life. Take these steps to understand individual IRA contribution limits.