Retirement savings has been a hot topic in the news as of late with research showing $1M won’t be enough for many to get through retirement. It’s a race against the clock, and it’s up to you and your advisor to determine how to maximize contributions to all your accounts to ensure you reach your retirement goals. However, this can get tricky when taking IRA contribution limits into consideration.
Regular Contributions to IRAs
If you’re like most, you have your money in one of the two primary types of IRAs, a Roth or Traditional IRA, with the main difference between the two being when you’re taxed on the contribution.
Limits exist on these contributions because you experience tax benefits with either type of IRA. Your contributions to a Traditional IRA are tax deductible in the year you make them. Your contributions to a Roth IRA are not, but when you start withdrawing the money after retirement, you withdraw it tax-free.
While you can have both a Traditional and Roth IRA at the same time, contribution limits are consolidated. You can contribute no more than $5,500 total to your accounts in the tax year 2017 and 2018. However, if you’re making contributions at or above the age of 50, you’re able to contribute $6,500 between each account per year. Beyond this, your Roth IRA contribution can also be limited based on your filing status and income.
There are no age limits on making contributions to a Roth IRA, but once you reach the year you turn 70 ½, you can no longer make regular contributions to a Traditional IRA.
If rolling over funds from a separate retirement account into a Roth or traditional IRA, the IRA contribution limit does not apply.
You are also able to make rollover contributions to both Roth and Traditional IRAs regardless of your age.
IRAs & Employer/Business Retirement Plans
Participating in a retirement plan through you employer or business does not affect your ability to contribute to a Traditional or Roth IRA. You’re able to contribute to your IRA up to the yearly limit specific to your circumstances, and up to $18,000 a year to your 401(k) plan.
If you’re 50 or older and still feeling behind in your savings, there is also the option of catch-up contributions to your 401(k) that allow you to contribute up to $6,000 at the end of the calendar year.
IRA Deductible Limits
Beyond limits on contribution amounts, you should also be aware of the limitations on deductible contributions.
First and foremost, it’s important to keep in mind that Roth IRA contributions are not deductible.
Traditional IRA contributions can potentially be tax-deductible, but that amount can be limited if you or your spouse participates in a retirement plan through their employer and if your income exceeds a certain amount.
If you’re single or head of household, participate in an employer retirement plan and your adjusted growth income (AGI) is more than $63,000, you’ll receive a partial deduction. If you make more than $73,000, you will not receive a deduction.
If you’re married filing jointly or a qualifying widower, you or your spouse participates in an employer retirement plan and your AGI is more than $101,000, you’ll receive a partial deduction. If your AGI exceeds $121,000, you will not receive a deduction.
A CFP® professional can help you plan your contributions to retirement plans that are mindful of the various limitations and will keep you on track to achieving your retirement goals. He or she can also work with your accountant to keep your tax burden low.