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Contributing to an individual retirement account (IRA) is a great way to boost your retirement savings. According to the Investment Company Institute, approximately 33% of American households use IRAs to save for retirement, with total IRA assets at $9.5 trillion in the first quarter of 2020. The amount you can contribute each year to an IRA depends on factors like your age, income, and whether or not you’re covered by another retirement plan. Here’s everything you need to know about IRA contribution limits for 2019 and 2020.
[Note: The federal tax filing and payment deadlines have been extended due to COVID-19. You have until July 15th, 2020 to make contributions to your IRA for tax year 2019.]
Traditional IRA Contribution Limits
The annual contribution limits for a Traditional IRA in 2019 and 2020 are $6,000 or your taxable compensation, whichever is lower. If you will be 50 or older by the end of a year, you may contribute up to $7,000 for that year to a Traditional IRA.
Tax Deductions for Traditional IRA Contributions
For some savers, contributions to a Traditional IRA may be tax-deductible. If you (and your spouse) are not covered by an employer-sponsored retirement plan, you may deduct your full contribution from your taxes. For example, if you did not participate in a 401(k) plan and you contributed $6,000 to a Traditional IRA, you would be able to deduct the full $6,000 amount.
If you are covered by an employer-sponsored retirement plan, then the Traditional IRA tax deduction may be limited based on your modified adjusted gross income (MAGI). Your MAGI is your adjusted gross income on your federal tax return before subtracting the student loan interest tax deduction and certain other deductions.
Check your eligibility for a Traditional IRA tax deduction against these income limits if you participate in your employer’s retirement plan:
Roth IRA Contribution Limits
Roth IRAs have the same annual contribution limits as Traditional IRAs: $6,000 or your taxable compensation, whichever is lower. If you will be 50 or older by the end of a year, you may contribute up to $7,000 for that year to a Roth IRA.
However, not everyone is allowed to contribute to a Roth IRA. If your income is above certain thresholds, you may be ineligible for a Roth IRA or your contributions may be limited. Here are the Roth IRA income thresholds for 2019 and 2020:
Exceptions to IRA Limits and Recent Changes
As with all things, there are exceptions to the rules for IRA contributions. In addition, recent changes have altered long-standing rules governing IRA contributions.
- Contributions are no longer restricted by age. For 2019, people who were 70 ½ or older couldn’t make regular contributions to a Traditional IRA. But as of 2020, there is no age limit on making contributions to either Traditional IRAs or Roth IRAs.
- Non-working spouses may contribute to an IRA. If you do not have taxable compensation, but file a joint return with a spouse who works and earns income, you can open up an IRA in your own name and make contributions. The combined IRA contribution limit for both spouses is $12,000 per year, or $14,000 per year if you are both over 50.
- Contribution limits don’t apply to rollover contributions. If you roll over another retirement plan—such as a 401(k) from a previous employer— into your IRA, the rollover doesn’t count toward the annual contribution limit.
What Happens If You Contribute Too Much to an IRA?
If you aren’t careful with your IRA contributions, you can exceed the annual limits. People who are juggling multiple IRA accounts or set automated contributions too high could end up putting too much money in a Roth IRA or a Traditional IRA.
If you’ve exceeded contribution limits, the IRS charges a 6% tax each year on the excess contributions in your account, unless you fix the situation. If you realize your error before you file your tax return, you may withdraw the excess contributions—including earnings—ahead of the tax filing deadline to avoid the 6% tax.
[Note: The federal tax filing and payment deadlines were extended due to the coronavirus pandemic. You have until July 15 to file your tax return and make any necessary adjustments.]
However, you may have to pay income taxes on the earnings and an additional 10% early withdrawal penalty on the amount of extra contributions you withdraw if you are under the age of 59 ½.
[The CARES Act waives the 10% early withdrawal penalty on withdrawals made during 2020.]
If you don’t catch the problem until after you’ve filed your tax return for the year, you can remove the excess contributions and file an amended return by October 15. If you miss the later deadline, you can still fix it by reducing next year’s contributions by the excess amount. But you’ll have to pay the 6% penalty until the excess contributions are corrected.
If you contributed too much to your IRA, it might be a good idea to talk with a tax professional or a financial advisor about setting up better ways to manage your contributions.
What Is the Saver’s Credit?
To encourage taxpayers to save for retirement, the government offers an incentive: the Retirement Savings Contributions Credit, also known as the Saver’s Credit. Available to low- and moderate-income earners, you may be eligible for the credit if:
- You make contributions to an IRA or an employer-sponsored retirement plan
- You are age 18 or older
- You’re not a full-time student
- You aren’t claimed as a dependent on someone else’s tax return
For IRA contributions, the amount of the Saver’s Credit is 50%, 20%, or 10% of your contributions, depending on your adjusted gross income. The maximum qualifying contribution is $2,000 ($4,000 if married and filing a joint return), so the maximum Saver’s Credit is $1,000.