Simplified IRA Contribution Limitations
Individual retirement accounts can be a good way to save for retirement, but contributions to the accounts are limited by the Internal Revenue Service. There are a number of different types of IRAs, and most have slightly different contribution rules. In addition to restrictions on the amounts that may be contributed, the IRS also limits the tax-deductibility of contributions.
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Types of IRAs
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The five main types of IRAs are traditional, Roth, SEP, Education and SIMPLE. Contributions and earnings of all IRA types grow tax-deferred until distribution, except in the case of Roth accounts, where earnings and distributions are tax-free.
Traditional IRAs
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Traditional IRAs were the first type of individual retirement account. Contributions are made on a pre-tax basis. The maximum contribution to a traditional IRA is $5,000 per year, $6,000 if you are age 50 or older. Contributions are limited to the amount of your taxable compensation. Deductibility of contributions may be limited based on your modified adjusted gross income (MAGI), your tax filing status, and whether you are covered by a retirement plan at work. IRS Publication 590 provides annually updated tables showing the deductibility restrictions.
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Roth IRAs
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Roth IRAs share the same contribution limits as traditional IRAs, or $5,000 for account owners younger than 50 years of age. You can contribute to both a traditional and a Roth IRA in the same year, but the total contribution cannot exceed this $5,000 limit, or $6,000 for account holders 50 or older. Contributions to a Roth IRA are made on an after-tax basis, so your MAGI cannot affect the deductibility of your contributions. However, your MAGI can limit the amount you can contribute to your Roth. These limitations are also found in IRS Publication 590, and are updated annually.
SEP IRAs
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A SEP IRA is an employer-sponsored retirement plan that allows employer contribution to employee accounts. SEP contributions are limited to $49,000, or 25 percent of an employee's compensation, whichever is less. As employees are not permitted to make contributions to SEP accounts, deductibility is not a factor. Employers are allowed to deduct all legal contributions made on behalf of employees.
Education IRAs
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Education IRAs, which are known as Coverdell savings accounts, have an annual contribution limit of $2,000 per beneficiary, regardless of the number of accounts established. Contributions are not tax-deductible, but do grow tax-deferred.
SIMPLE IRAs
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A SIMPLE IRA is an employer-sponsored retirement plan that allows contributions from both employers and employees. Employee contributions are limited to $11,500, or $14,000 for employees 50 years of age or older. Contributions are made on a salary deferral basis and are not taxed. Employers are required to make either matching or elective contributions to employee accounts, and these contributions are deductible.
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