IRA Contribution Limits

LAST REVIEWED Oct 29 2020 9 MIN READ

By The Human Interest Team

An Individual Retirement Account (IRA) is one of the best options, outside of an employer-sponsored 401(k) plan, for investing for retirement. IRA plans, which used to be known as Individual Retirement Arrangements, allow you to contribute money in a tax-advantaged account. This money can grow to fund your golden years and to help you manage post-retirement costs. You can open an IRA through a bank, brokerage firm, credit union, or other financial institution.

IRA Contribution Limits

IRAs have annual contribution limits. Some of the factors that change your total allowable contribution levels include the type of IRA you have, your age, your earnings, and if you or your spouse have a workplace retirement plan. The general contributions limits are as follow for 2019 and 2020:

  • Traditional and Roth IRAs: You can contribute up to $6,000 in 2020 ($7,000 if you’re over age 50).

  • SIMPLE (Savings Incentive Match for Employees) IRAs: $13,500, or $16,500 if you are over 50 years old.

  • SEP IRAs: up to $57,000 or 25% of compensation or net self-employment earnings, whichever amount is lesser.

Traditional IRA contributions cannot be limited by annual income. However, not all contributions are deductible. Also, depending on your Modified Adjusted Gross Income (MAGI), you may still be able to make fully or partially deductible contributions even if you have a workplace retirement plan. Roth contributions, however, are dependent on your MAGI and filing status. The annual deadline for both traditional and Roth contributions is April 15 of the following calendar year.

Under the rules for SEP IRAs, only employers (or the self-employed individuals themselves) can make contributions. As a self-employed individual, you can make contributions of up to 25% of your net earnings. However, be careful to subtract both SEP contributions and half of your self-employment tax before calculating the 25% cap. Effectively, this rate becomes 20% of your gross income. The annual contribution deadline for SEP IRA contributions is also April 15 of the following calendar year.

Employers, self-employed individuals, and employees can all make contributions to SIMPLE IRAs. Employees can contribute up to $13,500 ($16,500 if they’re over 50 years old), and their contribution deadline is Dec. 31 of the calendar year. Employers can, but are not required to, contribute 2% of an individual employee’s compensation or make matching contributions of up to 3%.

Regardless of account type, individuals can’t contribute more than their annual taxable compensation. This includes wages, salaries, commissions, bonuses, tips, and more. However, this does not include income such as rental income, capital investment income, or income from annuities, pensions, and deferred compensation.

One exception is that spouses may create an IRA for a non-working spouse, and the contributions do not count under the contributing spouse’s contribution cap for their own accounts. 

How IRA Contribution Limits Work

The IRA contributions have some specific exceptions and specific rules for non-standard circumstances. These changes to the contribution limits include:

  • Traditional IRAs: These IRAs give up-front tax breaks to contributing individuals because you can contribute pre-tax dollars. For example, if you contribute the max of $6,000, you can remove the $6,000 from your total taxable income. However, if you or your spouse have a workplace retirement plan and a high level of income, it may reduce the total deductible amount of money you can contribute. You may still contribute non-deductible amounts up to the cap.

  • Roth IRAs: Roth IRA contributions do not reduce your current year’s total taxable income. Instead, your future withdrawals will not be taxed. However, as your income increases, your eligibility to make Roth IRA contributions reduces.

  • SIMPLE IRAs: Employers may open SIMPLE IRAs for themselves or their employees if they have a business with fewer than 100 employees. Contributors may contribute to both SIMPLE IRAs and traditional and Roth IRAs; the contributions in one category do not affect contribution limits to the other.

  • SEP IRAs: SEP (Simplified Employee Pension) IRAs can be opened and contributed to by self-employed individuals and small business owners. If you receive contributions through your SEP IRA from your employer, you can still contribute the full amount to your traditional or Roth IRAs.

Traditional IRA Deduction Limits

Single and married individuals face the following income rules for making contributions to traditional IRAs:

May Make Full Contributions

Deduction Amount Phases Out

Deduction Is Lost

Modified Adjusted Gross Income (MAGI) of Individuals Filing Separately

        ≤ $65,000

> $65,000 but < $75,000

≥ $75,000

Modified Adjusted Gross Income (MAGI) of Married Couples Filing Jointly

       ≤ $104,000

> $104,000 but < $124,000

 ≥ $124,000

Modified Adjusted Gross Income (MAGI) of Married Couples Filing Separately

If you are not eligible for MAGI, the deduction limit will be full up to the amount of your contribution limit 

< $10,000

≥ $10,000

Modified Adjusted Gross Income for Non-Active Participant Spouses

≤ $196,000

> $196,000 but < $206,000

< $206,000

Roth Contribution Limits

Single and married individuals face the following income rules for making contributions to Roth IRAs:

May Make Full Contributions

Deduction Amount Phases Out

Deduction Is Lost

Modified Adjusted Gross Income (MAGI) of Individuals Filing Separately

< $124,00

≥ $124,000 but < $139,000

≥ $139,000

Modified Adjusted Gross Income (MAGI) of Married Couples Filing Jointly

< $196,000

≥ $196,000 but < $206,000

≥ $206,000

Modified Adjusted Gross Income (MAGI) of Married Couples Filing Separately

If you are not eligible for MAGI, the deduction limit will be full up to the amount of your contribution limit 

< $10,000

≥ $10,000

If your income level makes you ineligible to contribute to a Roth IRA, you may use a backdoor approach by converting a nondeductible IRA into a Roth.

How to Calculate Your IRA Contribution if your Deduction is Phasing Out 

If your deduction amount is phasing out due to your income, it can be challenging to determine your maximum allowable contribution without incurring excess penalties. These penalties can equal to 6% of your excess contribution. You can use the worksheets in Publication 590-A from the IRS to determine to allowed traditional IRA contribution.

Managing IRAs can also be challenging. If your small business needs help managing and administering IRAs or other retirement account plans, Human Interest is here to help. Contact us today to find a management plan that suits you and your employees’ retirement needs.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.

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