When planning your retirement savings, understanding the annual contribution limits for Individual Retirement Accounts (IRAs), Roth IRAs, and how these interact with 401(k) contributions is essential. Below is an itemized breakdown of contribution limits, income caps, and key considerations.
1. Traditional IRA Contribution Limits (2024)
- Annual Contribution Limit: $6,500 (under 50); $7,500 (50 and older, with catch-up contributions).
- Income Limit for Deductibility (if covered by a 401(k) or similar plan):
- Single Filers: Deduction phases out between $73,000 and $83,000 of Modified Adjusted Gross Income (MAGI).
- Married Filing Jointly:
- If the contributor is covered by a workplace plan: Deduction phases out between $116,000 and $136,000 MAGI.
- If the spouse is covered: Phases out between $218,000 and $228,000 MAGI.
- Not Covered by a Workplace Plan such as a 401(k) plan: No income limit for deduction.
- If you’re not covered by a workplace retirement plan like a 401(k), there is no income limit for making pre-tax contributions to a Traditional IRA. You can contribute up to the annual limit ($6,500 for 2024, or $7,500 if you’re 50 or older), and the full amount is deductible on your taxes, regardless of your income level. However, if your spouse is covered by a workplace plan and you file taxes jointly, the deductibility of your contribution may be subject to income limits: Deduction phases out between $218,000 and $228,000 of MAGI. So, even if you’re not personally covered, your spouse’s workplace plan could affect the deductibility of your Traditional IRA contributions.
2. Roth IRA Contribution Limits (2024)
- Annual Contribution Limit: $6,500 (under 50); $7,500 (50 and older).
- Income Limit for Eligibility:
- Single Filers: Phases out between $146,000 and $161,000 MAGI.
- Married Filing Jointly: Phases out between $228,000 and $243,000 MAGI.
3. Non-Deductible Traditional IRA Contributions
- If you’re above the income limits for deductible IRAs or Roth IRAs, you can still contribute to a Traditional IRA on a non-deductible basis.
- Tax Impact: Contributions are not tax-deductible, but earnings grow tax-deferred. Withdrawals may be partially taxable.
4. Considerations When You Also Contribute to a 401(k)
- Impact on Traditional IRA Deductibility: If you participate in a 401(k), the deductibility of Traditional IRA contributions depends on your income (as detailed above).
- No Impact on Roth IRA Eligibility: Roth IRA contribution limits are based solely on MAGI and not on participation in a 401(k).
5. Caution: Pro-Rata Rule for Roth IRA Conversions
If you plan to make non-deductible IRA contributions and later convert them to a Roth IRA (commonly known as a “backdoor Roth IRA”), be aware of the pro-rata rule. This rule requires you to calculate taxes on the conversion based on the proportion of pre-tax and after-tax funds across all your traditional IRAs.
- For example, if you have pre-tax funds in any Traditional IRA, a portion of the conversion will be taxable, even if you’re converting non-deductible contributions.
- Reference: Learn more about the pro-rata rule and its implications here. See Backdoor Roth IRA Conversion Pro-Rata Calculator and Rules for more details.
By balancing 401(k) and IRA contributions, you can maximize tax benefits and long-term retirement growth. If income caps restrict your IRA options, consider strategies like non-deductible IRA contributions or a Roth IRA conversion. In terms of non-deductible IRA contributions, you’ll need to track its basis for tax purposes.