- If income limits are met, taxes are not paid on contributions in the year they are made.
- Taxes are paid on distributions in the year withdrawals are made.
- IRA annual contribution limit is $6,000 for those under 50 and $7,000 for those 50 and older.
IRA Contribution Limits – 2020
The importance of saving for retirement is well-established, and a variety of programs have been created to make setting money aside as painless as possible. One of the most popular is the Traditional Individual Retirement Arrangement (IRA), which was established in 1974 to encourage savings through tax incentives.
Understanding the Traditional IRA
The beauty of the Traditional IRA is its simplicity. If your income falls within certain limits, you will not pay taxes on funds you contribute to your retirement account until you take a distribution. In addition to the tax benefits of reducing income in the year contributions are made, some contributors may be eligible for a special credit designed to assist low and moderate income workers. This credit is known as the Retirement Savings Contributions Credit (Saver’s Credit). Contributions are permitted for workers with earned income until the age of 70 ½, and distributions can be taken at any time. However, if distributions are taken before you reach age 59 ½, you may be required to pay a 10% tax penalty in addition to any applicable taxes. After the age of 70 ½, you must take required minimum distributions (RMD) from your Traditional IRA.
2020 IRA Contribution Limits
The IRS reviews guidelines for IRA contribution limits annually. Individuals under the age of 50 can contribute up to $6,000 or the total amount of earned income, whichever is lower. IRA contribution limits for those age 50 and older include an additional catch-up amount of $1,000 for a total of $7,000. Eligibility for deducting IRA contributions on taxes depends on the amount of earned income during the year and whether you contribute to a retirement plan at work.
- If you contribute to a retirement plan at work (or you are married and your spouse does) and your income exceeds certain amounts, your deduction may be limited.
- If you do not contribute to a retirement plan and your income meets certain limits, you may deduct your contribution in full.
- The IRS provides details on deduction limits for those contributing to a retirement plan and those not contributing to a retirement plan.
IRAs are designed to make it as easy as possible for you to save. You have more than 15 months to make deposits for any specific tax year. The time frame extends from January 1 of the current year through the tax filing deadline of the following year, which is usually on or around April 15. For example, 2019 contributions can be made from January 1, 2019, through the deadline to file 2019 taxes in April of 2020.
Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This article is not intended as investment advice, and Wealthfront does not represent in any manner that the circumstances described herein will result in any particular outcome. Financial advisory services are only provided to investors who become Wealthfront clients.
This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.