When it comes to building your retirement safety net, retirement plans come in handy due to their unique tax benefits. One retirement account that is widely used is the traditional IRA. With a traditional IRA, your contributions might be tax deductible, you grow the account on a tax-deferred basis and pay applicable tax during retirement. There are no traditional IRA income limits to making contributions to the account. But, the IRS has income phase-out ranges that determine your eligibility for tax deductions.
These income limits determine whether you qualify for a full deduction, partial deduction, or no deduction. Traditional IRA phase-out ranges change every year and they are based on your income, other retirement benefits you have from work, and your filing status.
Here is everything you need to know about traditional IRA income limits and phase-out ranges in 2024.
How to qualify for the traditional IRA tax deductions?
To qualify for traditional IRA deductions, you must earn an income and meet the IRS income limits for traditional IRA.
The traditional IRA income limits phase-out ranges are based on your filing status, income level, and other benefits you have from work. If your modified adjusted gross income (MAGI) falls outside of the limits for that year, you will not be eligible for tax deductions.
If you don’t have retirement benefits from your work, the traditional IRA income phase-out ranges do not apply. In other words, you will qualify for a full deduction on the amount you contributed to your traditional IRA.
The traditional IRA phaseout ranges if you are covered by other benefits from work
One of the benefits of a traditional IRA is that you can make contributions regardless of your income. The downside of this account is that if your income falls outside of the acceptable traditional IRA income limits, you will not qualify for deductions.
Traditional IRA income phase-out ranges in 2024
- You can qualify for a full deduction if your modified AGI is equal to or less than $77,000. When your modified AGI is between $77,000 and $87,000, you will qualify for a partial deduction. With a modified AGI higher than $87,000, you will not qualify for the deduction.
- If you are married and filing jointly and your modified AGI is equal to or less than $123,000, you will qualify for a full deduction. An income between $123,000 and $143,000 will get you a partial deduction. You will not be eligible for deductions if your income is equal to or higher than $143,000.
- Finally, if you are married but filing separately and your modified AGI is under $10,000, you will have a partial deduction. On the other hand, if your modified AGI is equal to or greater than $10,000, you will not qualify for deductions under the same filing status.
Traditional IRA contribution limit
In 2024, the traditional IRA contribution limits are $7,000 or $8,000 if you are 50 or older. These contributions can be tax-deductible if you meet the traditional IRA phase-out ranges we discussed above. The Roth IRA has the same contribution limits as the traditional IRA for 2022. The only difference is that you make contributions with after-tax wages.
Traditional IRA contribution limits in 2023
The contribution limits to traditional IRA in 2023 are $6,500. If you are 50 or older, you can contribute up to $7,500. These contribution limits are the same as the Roth IRA limits in 2023.
Why should you choose a traditional IRA?
Like any other retirement account, the traditional IRA comes with a lot of tax benefits. Tax deductions on your contributions are the biggest direct benefit of a traditional IRA. Any upfront deduction to your contributions lowers your taxable income. Hence, reducing your tax liability for the year you contributed to the account.
Another great reason you should have a traditional IRA is the tax-deferred growth of your account. The biggest investing secret is compound interest and it works well on long-term investments.
With compound interest, you get to earn returns on your principals and on your returns at the same time. In other words, you earn interest on the money you earn, and eventually, your portfolio starts growing exponentially. By not paying taxes on your earnings, you take full advantage of compound interest.
Unlike your pre-tax 401(k) plan where you are restricted to a few investment options, the traditional IRA comes with a wider range of investments. With a traditional IRA, you can invest in mutual funds, exchange-traded funds(ETFs), index funds, individual stocks bonds, etc. This makes it easy to diversify your portfolio and maximize your return on investment.
Where can you open a traditional IRA?
Having a traditional IRA is a great financial decision especially if you are not covered by your workplace. The IRA comes with a lot of tax benefits to help you boost your retirement savings.
You can open a traditional IRA from a local bank credit union, online brokerage firm, and other investment companies with retirement benefits. Some of the best online places to open a traditional IRA include Fidelity, Charles Schwab, Vanguard, and Blackrock.
Does the traditional IRA require RMDs?
The traditional IRA comes with RMDs with you turn 73. RMDs are mandatory distributions you must take from the account when you reach a certain age. For 2024, you must start taking RMD when you reach 73. Failure to take RMDs might result in a 50% tax on the money you did not distribute.
Is there an income limit for a traditional IRA?
The traditional IRA does not come with income limits to make contributions. Additionally, you can make contributions to a traditional IRA regardless of your age. The only limitations apply to tax deductions on your contributions. The IRS has income phase-out ranges that determine your eligibility for tax deductions. The amount you can deduct depends on your income, filing status, and other benefits you have from work.
What are the rules for a traditional IRA?
The rules for a traditional IRA are simple. First, you need to know the contribution limits to a traditional IRA for the year. In 2024, you can contribute up to $7,000 or $8,000 if you are 50 or older. For 2023, you can contribute up to $6,500 or $7,500 if you are 50 or older.
Second, you need to understand that withdrawing money from the account before turning 59½ might result in a 10% penalty plus income tax on your distributions.
Third, the traditional IRA comes with RMDs when you turn 73. If you have been delaying taking RMDs, start taking RMDs when you turn 73 to avoid an excess tax penalty. Typically, you pay a 50% penalty on the money you did not distribute.
The fourth traditional IRA rule is that all your contributions might not be deductible. The amount that qualifies for tax deduction will depend on your modified adjusted gross income(MAGI), filing status, and other benefits you have from work.
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