Knowing the Traditional IRA contribution limits is essential to potential and existing investors. Understanding these limits will emphasize the importance of starting to save early as well as the importance of consistency in contributing to your IRA. In this article, we’ve broken down a few frequently asked questions about Traditional IRA contribution limits.
Traditional IRA Contribution Limits FAQs For Investors
In This Article:
- What Is an IRA?
- How Does a Traditional IRA Compare to a Roth IRA?
- When Do I Make IRA Contributions?
- What Are the Limits on IRA Contributions?
- Do Married Couples Have the Same IRA Contribution Limits?
- Why Are There Traditional IRA Contribution Limits?
- Do the Limits Apply to IRA Rollover Contributions?
- What If I Go beyond the Traditional IRA Contribution Limits?
What Is an IRA?
Before you know about Traditional IRA contribution limits, it’s important to understand what an IRA is. People have a variety of options to save for retirement. You may want to put money in a retirement plan sponsored by your employer, called a 401(k). However, for a variety of reasons some people may not have access to an employer-sponsored retirement plan. Additionally, many people may simply want to diversify their retirement planning. An Independent Retirement Account (IRA) offers a way for you to save and invest money over time with potential tax-deductions.
How Does a Traditional IRA Compare to a Roth IRA?
There are a few different kinds of IRAs. Traditional IRAs and Roth IRAs are some of the most common.
Although both of them help you save for retirement, they do different things. With a Traditional IRA, you can deduct some or all of your contributions on your taxes. You pay taxes on the money once you withdraw it.
With a Roth IRA, you do not deduct your contributions. In exchange, you may not have to pay taxes on qualified withdrawals. Planning to put money into a Roth IRA for 2018? Your adjusted gross income must be less than $199,000 if you and your spouse are filing jointly.
However, the Traditional and Roth IRAs can be alike. Both the Roth IRA and the Traditional IRA contribution limits are the same.
When Do I Make IRA Contributions?
You may think you can only put money into an IRA account on a calendar year cycle. This is not wholly true. You may invest money into your IRA account for 2018 anytime during 2018.
If you want to make an extra contribution to a Traditional IRA, you may have more time. Some people deposit extra money up until the tax-filing deadline for that calendar year. This way, they can claim it as a tax deduction. The deadline usually falls somewhere in the middle of April of the following year.
What Are the Limits on IRA Contributions?
Each type of IRA has limits on the amount of investment you can make in one year. These limits depend on your age. They may also be according to the income limits. You cannot invest more money than you make in a year. What if you make less than the standard Traditional IRA contribution limits? Then that is your maximum for that year.
People who are less than 50 years old can put in up to $5,500 in IRAs each year. Once you turn 50, that number increases to $6,500. This extension of the limit is called a “catch-up contribution.”
The Traditional IRA and Roth IRA contribution limits are alike. If you have a higher income, you may not be able to contribute as much to a Roth IRA. These limits represent the total amount you can put in each year. Even if you have several IRAs, you cannot put in more than this.
Do Married Couples Have the Same IRA Contribution Limits?
People who are married and filing jointly may have a little advantage in IRA contributions. They do not always make the same amount of money.
The amount they can put into an IRA is the same as it would be for someone at a similar age. You can still contribute to an IRA even if you or your spouse did not have any taxable income in a particular year. Spousal contributions must not exceed your joint taxable income or your respective individual contribution limits.
Why Are There Traditional IRA Contribution Limits?
Since IRAs offer some tax advantages, the federal government sets restrictions. People who put money into a Traditional IRA can do so before they pay their taxes. They can also claim a tax deduction after the fact.
Those who invest in a Roth IRA get no tax deduction. They may take withdrawals later without having to pay taxes on it.
The government relies on tax money to fund programs and services. What happens when there are no Traditional IRA contribution limits? People with high incomes can funnel much of their income into it, and in turn, pay no taxes on it.
Do the Limits Apply to IRA Rollover Contributions?
If you have worked in several different jobs, you may have many retirement plans to manage. This can be a hassle, particularly if you do not have current information about the retirement savings from those positions.
Many people like to roll over their retirement savings into a new or current IRA. It helps them keep their money in a couple of accounts that are easier to manage. Rollovers do not count in your annual IRA contribution limits.
What If I Go Beyond the Traditional IRA Contribution Limits?
Having too much money to put into retirement may sound like a good problem to have. What you don’t know is it does create some complication. The Internal Revenue Service (IRS) may need you to pay a tax on the extra money. Situations where savers may put in too much include:
- People who invest in a Traditional IRA after they turn 70.5
- Those who put in more than $5,500 or $6,500 (depending on age)
- People who make more than one rollover per year
If you fall into this category, you may have to pay a 6% tax on the excess money. Most of the time, it may be easy to fix. People have to withdraw the extra money. They also remove any interest income they collected off that money.
Understanding the Traditional IRA contribution limits is important. It lets you determine how much to invest as well as some of the lesser known rules about IRAs. With this information, you can maximize your retirement savings while avoiding unnecessary financial penalties.
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