The Internal Revenue Service sets IRA contribution limits each year that determine how much cash you are allowed to place into your Individual Retirement Account in a given tax year. There are two types of IRAs available to most people with jobs:
- Traditional IRAs, in which your initial contribution may be tax-deductible, your investments grow tax-deferred, and your withdrawals are taxed as regular income in retirement.
- Roth IRAs, in which your initial contribution is made with after-tax dollars, your investments grow tax-deferred, and qualifying withdrawals in retirement can be taken completely tax-free.
Those IRA types share some rules on contribution limits and deadlines, while other rules differ by type. The law places two sets of key limits on your contributions: When you can contribute and how much you can contribute. The "when" question is easy: You can contribute for a given year between Jan. 1 of that year and the standard tax filing deadline for that year (typically April 15 of the next calendar year). The "how much" question is a bit trickier and depends on the year in question.
How IRA contribution limits change over time
For 2014, the maximum you may be able to contribute to an IRA is $5,500 if you're below age 50 or $6,500 if you're at least age 50 and can therefore make a $1,000 catch-up contribution. That $5,500 base contribution amount can increase in $500 increments based on inflation, while the catch-up amount does not change with inflation.
The last time the IRS permitted an inflation adjustment to the IRA contribution limits was for tax year 2013, when the cumulative inflation rate ticked up enough to boost it from $5,000 to $5,500. The next possible level is $6,000, which will be reached when inflation makes the average cost of goods and services about 9% higher than they were when the boost for 2013 happened.
Make sure you're eligible to contribute
In order to contribute to an IRA, you (or your spouse if you're married filing jointly) need to have sufficient compensation-style income to at least cover your contribution. To contribute to a traditional IRA, you also must be below age 70-1/2 at the end of the tax year in which you're contributing.
Roth IRAs have no age limit on contributions, but they do have an upper income limit. Most of those limits also index for inflation, and for 2014 the limits come into play at the following modified adjusted gross income levels, based on your tax filing status:
- Single, head of household, or married filing separately and did not live with your spouse at all during the year: Potential contributions begin to phase out starting at $114,000; no contributions allowed above $129,000.
- Married filing jointly or qualified widower: Phase-out starts at $181,000; no contributions allowed above $191,000.
- Married filing separately and did live with your spouse for at least part of the year: Phase-out starts at $0; no contributions allowed above $10,000.
Work within the limits to build a better retirement
An IRA can be an incredibly powerful tool to help you plan for your retirement. The tax-deferred compounding and potential for a tax deduction when you contribute or tax-free withdrawals in retirement can help your invested money work harder for you. The amount you can contribute each year is limited by time frames and dollar amounts. Understanding those limits and how to work within them can help you take advantage of an IRA to get yourself from here to a happy retirement.