When I opened my first IRA, I thought I was going to contribute as much as I could and pay no tax. Then, I learned there were IRA contribution limits imposed by the IRS each year. Yes, there is a limit to how much you can contribute to an IRA, and the eligibility to contribute and tax deduction varies from one type of IRA to another.
The IRA contribution limits in 2024 are $7,000 or $8,000 if you are 50 and older. For 2023, you can contribute up to $6,500 to your retirement account. If you are 50 or older, you can make an extra $1,000 catch-up contribution to an IRA.
What is an IRA?
An IRA a.k.a individual retirement account is a tax-advantaged account that lets you save money for retirement. You can open an IRA from a bank, credit union, or other financial institution such as a brokerage company.
The following are three common types of IRA.
- Traditional IRA
- Roth IRA
- Rollover IRA
The Roth IRA allows you to make after-tax contributions, grow your account tax-free, and take distributions tax-free. With A Roth IRA, you can also pass the account to your heirs without paying taxes. The maximum contributions to a Roth IRA in 2024 are $7,000 with an extra $1,000 catch-up contribution if you are 50 or older. For 2023, the Roth IRA contribution limits are $6,500 with an extra catch-up contribution of $1,000 if you are 50 or older.
The traditional IRA is similar to Roth IRA but you make contributions with before-tax money. This means you defer paying taxes until you are taking distributions during retirement. The traditional IRA also comes with required minimum distributions(RMD) when you turn 73. These are mandatory distributions imposed by the IRS to make sure that you pay tax on your account.
Similarly to a Roth IRA, you can contribute up to $7,000 to a traditional IRA in 2024. If you are 50 or older, you can make an extra $1,000 catch-up contribution.
What is a traditional IRA?
Traditional IRA is a retirement plan where some or all of the qualified contributions may be tax-deductible. With a traditional IRA, you can grow your account on a tax-deferred basis and only pay taxes on your distributions during retirement.
Keep in mind that a traditional IRA comes with the required minimum distribution when you turn 73. Without taking these RMDs, you will end up with a 50% tax penalty on the money you did not take out on time.
When does it make sense to open a traditional IRA?
A Traditional IRA is good for you under the following circumstances.
- You want to lower your account management fees
- You don’t have a 401(K) plan from work
- Need access to a wide range of investments
- You are expecting a lower retirement income
Unlike a pe-tax 401(k) where contributions come from payroll deductions and all are tax-deductible, contributions to your traditional IRA might not be tax-deductible. Depending on your income, filing status, and other benefits from work, your traditional IRA contributions will be fully or partially tax deductible.
Traditional IRA income limits for 2024
While you can contribute up to the maximum allowed to your traditional IRA, some of your contributions might not be tax-deductible. Your deduction eligibility depends on your income, filing status, and other benefits you have from work.
Here are the traditional IRA income limits for 2024 to determine your eligibility for deduction.
| Feature | MAGI(modified adjusted gross income) | Contribution limit |
| Single | <$73,000 but less than $83,000 | Partial deduction |
| Married filing joint | > $116,000 but less than $136,000 | Partial deduction |
| Married filing separate | between $0 and $10,000 | Partial deduction |
If your income is less than 73,000 for single and less than $116,000 for married couples filing joint, you will get a full deduction.
If your modified AGI is greater or equal to $83,000 for a single filer or $136,000 for a married couple filing jointly, your traditional IRA contributions will not be tax-deductible.
On the other hand, if you are married but filing separately and your modified AGI is higher than $10,000, you will not qualify for a deduction.
What is a Roth IRA?
A Roth IRA is a retirement account that lets you save money for retirement. With a Roth IRA, you make contributions with after-tax wages, grow your account tax-free, and pay no tax on qualified distributions during retirement.
Before you can contribute to a Roth IRA, you must earn an income and meet the income limits set by the IRS. That is your modified adjusted gross income (MAGI) and filing status(single, married, filing jointly, or married, filing separately), will affect your eligibility to contribute to a Roth IRA and how much you can contribute.
Roth IRA income limits for 2024
| Filing status | 2024 income ranges | Contribution limits |
| Single | $146,000 but less than $161,000 | Partial contribution |
| Married, filing jointly | $230,000 but less than $240,000 | Partial contribution |
| Married, filing separately | $0 but less than $10,000 | Partial contribution |
- If your income is less than $146,000 for single or $230,000 for married filing jointly, you will be eligible to contribute up to the limits which are $7,000 in 2024.
- If your income is equal to or greater than $161,000 for single or $240,000 for married couples filing separately, you will not be eligible to contribute to a Roth IRA.
What is a Rollover IRA?
A Rollover IRA is nothing other than an account that lets you move money from an employer-sponsored plan such as 401(K) into your IRA. In case you quit, get laid off, or go for something better, you will need to roll over your 401(k) plan or 403(b) plan into a more suitable account like an IRA. The rollover allows you to move your tax-advantaged plans into an IRA and maintain the same tax benefits at the same time.
The Rollover IRA allows you to keep the tax-deferred status of funds you had in your old 401(K) at the time of transfer.
In other words, a Rollover IRA protects you from 10% premature withdrawals and tax liabilities on the money you moved.
Related: What happens to your 401(K) when you quit your job?
IRA contribution limits in 2024
Both Roth IRA and traditional IRA have the same contribution limits in 2024. According to the IRS, you can contribute up to $7,000 or $8,000 if you are 50 or older in 2024.
Keep in mind that you cannot contribute an amount that is higher than your income. For this reason, if you made an income that is lower than IRA limits, your IRA contribution limits will be your income. For example, if you made $5,000 in 2023, your maximum contribution to an IRA will be $5,000 even if the IRS allows a $7,000 contribution limit.
Related: What are the 401(K) contribution limits in 2024?
How much should you contribute to your IRA?
If you can afford it, contribute up to the limit allowed by the IRS. Since the IRA contribution limits are $7,000 or $8,000 in 2024, you should contribute up to this limit. Before you max out your IRA contribution limits, however, consider other financial needs such as paying off debt and living expenses. The goal is to always make contributions to your IRA even if it is a small amount to start taking advantage of compound interest early enough.
Should I open a traditional IRA or a Roth IRA?
The IRA you open will depend on your retirement saving goals and current financial situation.
- If you are interested in lowering your current tax liability, open a traditional IRA. This is because qualified contributions to this account will be tax-deductible. A traditional IRA is also good for you if you anticipate a lower retirement income.
- If you don’t mind paying taxes now, open a Roth IRA. Although you will not have upfront tax benefits, you will grow a Roth IRA tax-free and pay no tax on qualified distributions. Additionally, a Roth IRA does not have RMDs and you can transfer the account to your descendants tax-free. You can also open a Roth IRA if you anticipate having a higher retirement income as withdrawals from your Roth account will help lower your taxes.
- If you have other retirement benefits such as a 401(k) or 403(b) plan from your employer, open a Roth IRA. The 401(k) will lower your current tax burden while the Roth IRA will lower your retirement tax liability.
Related: How much should you contribute to your 401(K) account
When can I withdraw money from my IRA account?
Most retirement accounts including IRAs require that you turn 59½ before you can withdraw your funds without a penalty. If you are planning to take money out of your IRA before turning 59½, be prepared to pay a 10% penalty and applicable tax.
For a traditional IRA, you must be 59½ before you can withdraw the money without a penalty. Taxes are always applied on deductible contributions you made to your traditional IRA.
For the Roth IRA, on the other hand, you can withdraw your money without a penalty as long as you are 59½ and your account has been open for 5 years or more.
IRA early withdrawal penalty
Withdrawing money from your IRA before retirement will trigger a penalty. Also, you may pay a tax on the funds you withdrew. For the Roth IRA, you must be 59½ and your account must be at least 5 years to avoid a penalty. Your contributions to a Roth IRA can be withdrawn without a penalty at any time.
The IRS has a 10% penalty and applicable tax on the money you withdrew from your IRA before you turn 59½. The only time this penalty can be waived is when you meet the IRS exceptions.
