How much can I contribute to Traditional IRA and is it Deductible?
How Much Can You Contribute to a Traditional IRA?
Remember: Due to the corona virus pandemic, the due date for making contributions to an IRA for the 2019 tax year has been pushed back from April 15 to July 15, 2020. If you have not contributed to IRA for 2019, you still have time to contribute for 2019.
IRA Contribution Limits
The maximum amount you can contribute to a traditional IRA for 2020 is $6,000 if you're younger than age 50. Workers age 50 and older can add an extra $1,000 per year as a "catch-up" contribution, bringing the maximum IRA contribution to $7,000. Contribution limits have not changed from 2019. You must have earnings from work to contribute to an IRA, and you can't put more into the account than you earned.
Your 2019 and 2020 IRA contributions may also be tax-deductible. If you – and your spouse, if married – don't have a retirement plan at work such as a 401(k), you can deduct the full contribution to your traditional IRA on your tax return no matter how much you earn. You have until the federal tax filing deadline to make your IRA contribution for the previous year.
Even if you have a retirement plan on the job, you may still be able to deduct some or all of your contribution depending on your income. For 2020 IRA contributions, the amount of income you can have and still get a full or partial deduction rises slightly from 2019. Singles with modified adjusted gross income of $65,000 or less and joint filers with income of up to $104,000 can deduct their full contribution for the 2020 tax year. Deductions thereafter decrease and phase out completely once income reaches $75,000 for singles and $124,000 for joint filers. For 2019, singles with modified adjusted gross income of up to $64,000 and married joint filers with income of $103,000 or less will be able to deduct their full contributions.
Be aware that you generally must have earned income to contribute to an IRA. But if you're married and one of you doesn't work, the employed spouse can make a contribution into a so-called spousal IRA for the other.
You can open a traditional IRA through a bank, brokerage, or mutual fund company and invest your IRA money in stocks, bonds, mutual funds, exchange-traded funds, and other approved investments.
Why Save for Retirement in an IRA?
The tax deduction plus the tax-deferred growth that a traditional IRA provides can help build a sizable retirement nest egg. For example, a 25-year-old who contributes $5,500 a year to a deductible IRA and has an annual return of 6% will accrue a nest egg of $902,262 at age 65. If instead he or she is in the 22% tax bracket and invests the funds in a taxable account earning a 6% annual return, the account would grow to about $643,500 by age 65. The difference is the brake that paying the IRS on each year's earnings puts on compounded growth.
Eventually, you will have to pay taxes on your traditional IRA. Your withdrawals will be subject to ordinary income tax. On top of that, if you take the money out before turning age 59 1/2, you can be hit with a 10% penalty. You will also be obligated to take required minimum distributions (RMDs after you turn age 72, so you won't be able to avoid the IRS forever).
Roth IRAs vs. Traditional IRAs
The tax rules differ for contributions to a Roth IRA, which aren't tax-deductible. Money instead goes into a Roth IRA after taxes have been paid on it, and you can withdraw contributions at any time free of taxes or penalties. The earnings can also be withdrawn tax- and penalty-free once you have owned the Roth IRA for five years and you're at least age 59 1/2. Also, Roth IRAs don't have required minimum distributions. The amount that can be contributed to a Roth IRA is subject to income limits.
You can split the IRA contribution between Traditional IRA and Roth IRA (if you qualify for Roth IRA contribution).
One final note: If you invest in both a traditional IRA and a Roth IRA, the total amount of money you can contribute to both accounts can't exceed the annual limit of $6,000 ($7,000 if 50 or older). If you do exceed it, the IRS might hit you with a 6% excessive-contribution penalty.