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Contributing to an individual retirement account (IRA) can be a great way to build your nest egg and secure some valuable tax perks. But like a 401(k) or other workplace retirement accounts, there are contribution limits. Your income, along with your spouse's earnings, could also come into play. Understanding IRA contribution rules can help you get the most out of your account—and stay on the right side of the IRS.
IRA Contribution Limits for 2024
If you have an IRA, you can contribute up to the annual limit or the equivalent of your earned income, whichever is lower. There are two main types of IRAs:
- Traditional IRAs: Traditional IRA contributions may be tax deductible, which can reduce your taxable income. Your money then grows on a tax-deferred basis. That means you won't pay taxes until you make withdrawals in retirement. Pulling money out of your account before age 59½ will likely result in a 10% early withdrawal penalty, along with the amount being taxed as income. You need to begin taking required minimum distributions (RMDs) at age 73.
- Roth IRAs: This type of IRA is funded with money you've already paid taxes on. That means you can withdraw your contributions whenever you like, tax- and penalty-free. The same goes for investment earnings if you're at least 59½ and have had the account for five years or more. RMDs don't apply to Roth IRAs (unless it's an inherited account).
IRA contribution limits can change from year to year. Below are the limits for 2024. Note that the maximum amount is how much you can contribute to all your IRAs.
| 2024 IRA Contribution Limits | |
|---|---|
| Age | Maximum Contribution to All IRAs |
| Under 50 | $7,000 |
| 50 and older | $8,000 |
Source: IRS
IRA Income Limits for 2024
There are no income limits on traditional IRAs, but Roth IRAs are another story. As your income increases, the amount you can contribute may decrease. Below you'll find the Roth income limits for 2024. The earnings shown refer to modified adjusted gross income.
| 2024 Roth IRA Income Limits | |||
|---|---|---|---|
| Tax Filing Status | Can I Contribute the Maximum Amount? | When Are Contributions Reduced? | When Can I No Longer Contribute to a Roth IRA? |
| Single, head of household or married filing separately (and you didn't live with your spouse at any point during 2024) | Yes, if your income is less than $146,000 | When your income is $146,000 to $160,999 | When your income is $161,000+ |
| Married filing jointly or qualified widow(er) | Yes, if your income is less than $230,000 | $230,000 to $239,999 | $240,000+ |
| Married filing separately | No | $1 to $9,999 | $10,000+ |
Source: IRS
Earned income is income you must report on your federal tax return. That includes:
- Salary
- Wages
- Tips
- Overtime pay
- Severance pay
- Work bonuses paid by your employer
- Unemployment benefits
- Employer-paid perks such as free flights
- Pension benefits
- Dividends from stocks and mutual funds
- Earned interest
- Self-employment income
- Business income
- Gambling proceeds
- In some cases, a portion of your Social Security benefits
If you've taken time away from paid work, you might open a spousal IRA in your name. This allows your partner to make contributions on your behalf. To qualify:
- You must be legally married and file a joint tax return.
- Your spouse must earn taxable income.
Traditional IRA Deduction Limits for 2024
Traditional IRA contributions are tax deductible if you and your spouse aren't covered by a workplace retirement plan. If either of you are, the deduction begins to phase out based on your tax filing status and modified adjusted gross income.
| 2024 Traditional IRA Deduction Limits | |||
|---|---|---|---|
| Tax Filing Status | Can I Take the Full Tax Deduction? | When Is the Deduction Reduced? | When Can I No Longer Take the Deduction? |
| Single or head of household and covered by a workplace retirement plan | Yes, if your income is $77,000 or less | When your income is $77,001 to $86,999 | When your income is $87,000+ |
| Married filing jointly and you are covered by a workplace retirement plan | Yes, if your income is $123,000 or less | $123,001 to $142,999 | $143,000+ |
| Married filing jointly and your spouse is covered by a workplace retirement plan | Yes, if your income is $230,000 or less | $230,001 to $239,999 | $240,000+ |
| Married filing separately and you are covered by a workplace retirement plan | No | Less than $10,000 | $10,000+ |
Source: IRS
What Happens if You Contribute Too Much to an IRA?
Overfunding your IRAs could result in a 6% penalty for every year the money remains in your account, but you can avoid it if you catch the mistake early and fix it before the April tax filing deadline. You can either:
- Remove your excess contributions, plus earnings (removing money from a traditional IRA may result in a tax bill and a 10% early withdrawal penalty)
- Reassign your excess contributions to the following year
If tax day has passed, you can file an amended tax return before October 15. Just be sure to report any earnings you've made. But if you wait until after the October deadline, you can expect to be penalized.
The Bottom Line
Understanding IRA contribution rules can help you maximize your retirement savings and enjoy some tax benefits along the way. These guidelines also let you know how much you can contribute without being penalized. You can use 401(k)s and IRAs together to build a strong nest egg. Self-employed retirement plans can be another helpful resource if you work for yourself.