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Traditional and Roth IRAs help earners save for retirement by providing a tax-advantaged way to invest. Most earners can make deductible contributions to a traditional IRA and fund a Roth IRA up to the maximum combined annual contribution limit of $6,000.
As your income increases, however, the amount you can contribute to a Roth IRA decreases due to IRS phase-out ranges. Similarly, the amount you can deduct from your taxable income by contributing to a traditional IRA decreases with income as well. The highest earners are affected the most. Here's how IRA phase-out ranges work.
What Is a Phase-Out Range?
Phase-out ranges are tools the IRS uses to manage the extent to which taxpayers can benefit from tax perks such as deductions, deferrals, credits, exclusions and exemptions.
Tax-advantaged retirement accounts like traditional IRAs and Roth IRAs are structured with specific tax perks, like the ability to make pretax contributions and benefit from tax-free growth. The IRS restricts how much individual taxpayers can invest or deduct through tax-advantaged accounts to ensure middle- and low-income earners continue to benefit, as well as to prevent any high-income earners from receiving an unfair advantage.
Traditional IRAs and Roth IRAs differ in design and in the benefits they offer investors. Both also have their own distinct phase-out rules.
Roth IRA contributions are limited for certain incomes, reducing allowable contributions to zero dollars for very high earners.
Traditional IRA contributions aren't limited by income. Instead, the IRS limits who can claim a full tax deduction for the money they contribute to their traditional IRA, based on whether they're also covered by a workplace retirement plan and on their income.
Roth IRA Phase-Out Ranges
Most earners qualify to invest up to the total annual contribution limit for Roth and traditional IRAs combined, which is currently $6,000 (or $7,000 for those ages 50 and older). However, earners whose incomes fall within the phase-out range are restricted to a reduced Roth IRA contribution. And the highest earners aren't eligible to contribute to a Roth IRA at all.
Investors fund Roth IRAs with after-tax dollars, meaning contributions aren't tax-deductible. Contributions then grow tax-free and generate tax-exempt gains inside a Roth IRA. Qualified withdrawals (typically made in retirement) from a Roth IRA aren't taxed as income. As an added Roth IRA perk, you aren't required to take minimum distributions in retirement, which means you can leave your money to grow indefinitely.
If you fall into a Roth IRA phase-out range, the IRS provides instructions in Publication 590-A for figuring your contribution limit. It's often best to work with an accountant to calculate your contribution and figure your taxes accurately.
It's also useful to note that for both Roth and traditional IRA contributions, those who are married and filing separately can use income phase-out rules for single individuals as long as they haven't lived with their spouse at any point in the year.
Here are the Roth IRA income limits for 2021 and 2022:
| Roth IRA Income Limits in 2021 and 2022 | |||
|---|---|---|---|
| Filing Status | 2021 Income | 2022 Income | Amount You Can Contribute |
| Single, head of household or married filing separately (and you did not live with your spouse at any time during the year) | Less than $125,000 | Less than $129,000 | Up to the maximum ($6,000, or $7,000 if you are 50 or older) |
| $125,000 to $140,000 | $129,000 to $144,000 | A reduced amount | |
| $140,000 or more | $144,000 or more | Zero | |
| Married filing jointly or qualified widow(er) | Less than $198,000 | Less than $204,000 | Up to the maximum ($6,000, or $7,000 if you are 50 or older) |
| $198,000 to $208,000 | $204,000 to $214,000 | A reduced amount | |
| $208,000 or more | $214,000 or more | Zero | |
| Married filing separately | Less than $10,000 | Less than $10,000 | A reduced amount |
| $10,000 or more | $10,000 or more | Zero |
Source: IRS
Traditional IRA Phase-Out Ranges
The IRS doesn't limit how much you can invest in a traditional IRA based on how much you earn. Instead, phase-outs determine whether your income restricts you from claiming a full tax deduction for your traditional IRA contribution.
For most earners, investing in a traditional IRA lowers your taxable income dollar-for-dollar. The funds you invest grow tax-free until you withdraw them in retirement, at which point your distributions are taxed as income.
You can have a traditional IRA whether or not you're covered by a retirement plan through your employer. Those who don't have a workplace retirement plan can claim a full deduction for their traditional IRA contributions, regardless of income.
For example, if someone made $55,000 in taxable income in 2021 and invested $5,000 in a traditional IRA, their taxable income would decrease to $50,000.
Those covered by a plan at work may still be eligible to deduct their contributions, but earners in some income ranges will only be eligible for a partial deduction or possibly no deduction at all.
Note that you're considered covered by a workplace plan if your employer offers you a retirement plan, regardless of whether or not you chose to participate in or contribute to the plan. The phase-out ranges for earners covered by a workplace plan will apply to you.
Here are traditional IRA phase-out ranges for 2021 and 2022:
| Traditional IRA Deduction Limits for 2021 and 2022: Covered By a Plan at Work | |||
|---|---|---|---|
| Filing status | 2021 Income | 2022 Income | Deduction Limit |
| Single, head of household or married filing separately (and you did not live with your spouse at any time during the year) | $66,000 or less | $68,000 or less | Full deduction |
| More than $66,000 but less than $76,000 | More than $68,000 but less than $78,000 | Partial deduction | |
| $76,000 or more | $78,000 or more | No deduction | |
| Married filing jointly or qualifying widow(er) | $105,000 or less | $109,000 or less | Full deduction |
| More than $105,000 but less than $125,000 | $109,000 to $129,000 | Partial deduction | |
| $125,000 or more | $129,000 or more | No deduction | |
| Married (filing separately) | Less than $10,000 | Less than $10,000 | Partial deduction |
| $10,000 or more | $10,000 or more | No deduction |
Source: IRS
| Traditional IRA Deduction Limits for 2021 and 2022: Not Covered By a Plan at Work | |||
|---|---|---|---|
| Filing Status | 2021 Income | 2022 Income | Deduction Limit |
| Single, head of household, or qualifying widow(er) or married filing separately (and you did not live with your spouse at any time during the year) | Any amount | Any amount | Full deduction |
| Married filing jointly or separately with a spouse who is not covered | Any amount | Any amount | Full deduction |
| Married filing jointly with a spouse who is covered | $198,000 or less | $204,000 or less | Full deduction |
| More than $198,000 but less than $208,000 | More than $204,000 but less than $214,000 | Partial deduction | |
| $208,000 or more | $214,000 or more | No deduction | |
| Married filing separately with a spouse who is covered | Less than $10,000 | Less than $10,000 | Partial deduction |
| $10,000 or more | $10,000 or more | No deduction |
Source: IRS
If you fall into a phase-out income range, the IRS instructs you to use Worksheet 1-2: Figuring Your Reduced IRA Deduction for 2021 to determine your deduction. It's wise to work with an accountant to calculate your deduction accurately.
The Bottom Line
Saving for retirement is essential for achieving financial freedom in retirement, and tax-advantaged retirement accounts are an excellent way to maximize your investments and lower your taxes.
As your income increases, your contributions or deductible contributions may be lowered by income phase-outs. If phase-outs apply to your income, a tax professional such as an accountant can help file your taxes correctly and maximize your deductions.
A financial planner can also help you plan how much money to invest and where to invest it. If you haven't worked with a financial planner in the past, consider contacting one to help you develop a plan for your money.