Photo: Flickr user Garrett.
IRAs can be more powerful wealth-builders for retirement than 401(k)s, but they do come with some limits. Read on to learn more about IRA limits for 2014 in order to set yourself up for a better retirement.
The basics
First off, there are two main kinds of IRAs: traditional and Roth. With a traditional IRA, you contribute pre-tax money, reducing your taxable income for the year and thereby reducing your taxes, too. The money grows in your account and is taxed (at your ordinary income tax rate) when you withdraw it in retirement. With a Roth IRA, though, you contribute post-tax money, which grows in the account until you withdraw it tax-free in retirement.
Retirement plans provided by your employer, such as 401(k)s, have plenty of appeal, but in some ways IRAs are more compelling. For one thing, IRA investing can involve lower fees, especially if you set up your IRA with a low-cost brokerage and invest in no-load mutual funds and/or stocks. (An Investment Company Institute study reported that the average "all-in" fee for 401(k)s in 2011 was 0.83%. Many inexpensive index funds charge less than 0.25%.) IRAs also typically let you choose from a wider selection of investments, including most stocks and bonds and many mutual funds.
Contribution limits
The IRA limit for contributions in 2014 is $5,500 -- plus an extra $1,000 "catch-up" contribution for those age 50 or older. Note that Roth IRA contributions must be made with earned money. There's no minimum age for opening a Roth, but it must be funded with earned income. For kids, allowance or birthday money doesn't qualify, but cash earned through babysitting or odd jobs can. For adults, qualified earnings include wages, commissions, and even alimony payments, but not inheritances, pension or disability income, or Social Security benefits.
If you love the Roth IRA and would like to contribute more than the IRA limit for 2014, you can look into converting a traditional IRA to a Roth. There are no limits on how much you can convert, so a traditional IRA laden with many years of contributions can be converted in a single year -- so long as you can afford to do so, considering that any sum you convert will be counted as taxable income in the year of conversion. (After all, it was never taxed when it went into the traditional IRA.) So run the numbers before taking any action, as converting large sums can be costly up front -- though potentially worth the trouble in the long run. You might even be able to convert your 401(k) to a Roth IRA.
It's worth noting, too, that the IRA limit for 2014 contributions pales in comparison to the 401(k) cap, which $17,500, plus an additional $5,500 for those 50 and older. Still, an IRA can help you ensure a comfortable retirement, and many of us would do well to invest in both vehicles.
Eligibility limits
The Roth IRA limits for 2014 and beyond include income limits, too, as the ability to contribute to a Roth IRA is reduced or eliminated for folks with above-average incomes. Single filers with a modified adjusted gross income of less than $114,000 are safe, as are married couples who file jointly and have AGIs of less than $181,000. The IRS offers a Web page that explains how you can calculate your exact Roth IRA income limits.
People earning any level of income can contribute to a traditional IRA, but there are income-based limits on how much one can deduct for contributions to that type of IRA. The overall effect is similar to that of the Roth IRA income limits: Both thresholds reduce the usefulness of these tax-advantaged retirement accounts.
But the bottom line is that you probably don't need to worry about the IRA limits for 2014. Still, there's more to learn about IRAs and retirement planning in general. Take the time to get savvier, and you can make your retirement more comfortable.
