Guide: How to Maximize IRA Contributions
When you have decided to open an IRA or Roth IRA account for your retirement, many questions probably come to mind when it comes to maximum IRA contribution/max Roth IRA contribution. Questions such as:
- How much can I contribute to my IRA?
- What is the maximum IRA contribution?
- What is the max contribution to Roth IRA accounts?
- Is there a traditional IRA or Roth IRA minimum contribution?
- What is the traditional IRA vs. Roth IRA contribution deadline?
- How do I maximize my IRA contribution?
This guide will answer these questions and show you how to contribute to IRA accounts, how to contribute to Roth IRA accounts, and how to maximize your contributions.
And of course, we will explain the max traditional IRA and the max Roth IRA contribution you can make each year in detail. This guide will give you confidence on your way to building your retirement money.
An IRA – an individual retirement account – is not an investment in and of itself. It is an account to hold your retirement investments. By putting in the traditional IRA or Roth IRA max contribution, you are putting money in these investments.
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Traditional IRAs are (most of the time) tax deductible. You pay taxes on the money when you pull it out in retirement. This means that if you pay the maximum IRA contribution for this year, all of that money will be a tax deduction on this year’s taxes.
The difference between traditional IRAs and Roth IRA contributions is that Roth IRAs are taxed immediately. This means that if you put in the max Roth IRA contribution, you will have to include it on this year’s taxes. But you do not pay any extra taxes when you pull out the money in retirement.
How to Contribute to IRA Accounts
Before we get into a discussion on the maximum IRA contribution, let’s look at how to contribute to IRA accounts in the first place. You can either start a new account from scratch or roll over your existing retirement plan to your new traditional IRA.
If you have earned income throughout the year, you are eligible to contribute to your IRA account. Choose which financial institution to hold your account, and then make yearly contributions.
You can contribute in person (as long as a branch is near you), by mail, or online. Some financial institutions even offer apps that let you contribute from your mobile device.
How to Contribute to Roth IRA Accounts
Now, let’s see how to contribute to Roth IRA accounts. Roth IRA contributions start out very similarly to traditional IRA accounts. You can start a brand new account or you can do a rollover. As long as you have earned some income, you are eligible to contribute.
Just like traditional IRAs, you can put in your yearly contributions in person (if you are near a location or if a location is offered), online, by mail, or sometimes through apps on a mobile device.
How Much Can You Contribute to an IRA?
Sometimes people make the mistake of thinking that since it is their account, they can contribute as much as they want to their IRAs. The truth is traditional IRA and Roth IRA contributions are monitored and limited.
And the rules are not the same for everybody. Factors such as income and age play a role in determining the answer to the question, “How much can I contribute to my IRA?”
Keep in mind that these exact numbers can change slightly from year to year. These are the numbers from 2016.
Maximum IRA Contribution 101
Here are six general guidelines set up by the IRS about IRA contribution limits.
- The total maximum IRA contribution in 2016 cannot exceed $5,500 per person under the age of 50. This number goes up $1,000 for those ages 50 or older, creating a total of no more than $6,500 a year.
- IRA contributions are not limited by annual income other than one case. How much can you contribute to an IRA if you’ve made less than the maximum IRA contribution? If you have made less than $5,500 in taxable income for the year ($6,500 if you are 50 or older), you can only contribute up to the amount you made.
- The maximum IRA contribution stops at age 70 ½. The only way you can add to your traditional IRA at this age is to contribute to a Roth IRA and perform a rollover.
- If you are married and filing jointly, you do not need to have earned any income in order to put in the maximum IRA contribution for that year. This is true only if your spouse has made income.
- Even if your employer offers a different retirement package that you participate in, you can still give the maximum IRA contribution for that year. The only downside is you may or may not be able to deduct that contribution from your taxes.
Max Roth IRA Contribution 101
Here are five general guidelines set up by the IRS about Roth IRA contributions and the Roth IRA max contribution:
- The total max Roth IRA contribution in 2016 cannot exceed $5,500 per person if you are under the age of 50. This number goes up $1,000 for those ages 50 or older, creating a total of no more than $6,500 a year.
- If you’ve made less than the Roth IRA max contribution – $5,500 in taxable income for the year ($6,500 if you are 50 or older) – you can only contribute up to the amount you made.
- The max Roth IRA contribution is limited by annual income. See our chart below to learn if you can see what your Roth IRA max contribution will be in 2016.
- You can still make the max contribution to Roth IRA after the age of 70 ½ unlike the traditional IRA.
- If you are married and filing jointly, you do not need to have earned any income in order to put in the max Roth IRA contribution for that year. This is true only if your spouse has made income.
Roth IRA Max Contribution By Income Level Chart
Since Roth IRA contributions are a little more complicated, this is a helpful chart to understand the max contribution to Roth IRA accounts based on the IRS’s guide.
As you will see, your max Roth IRA contribution depends upon your tax filing status and your modified adjusted gross income.
Max Roth IRA
|Married filing jointly (you can also qualify as a widow/widower)||< $184,000||Full Limit|
|> $184,000 + < $194,000||Partial (Roth IRA Contribution Calculator)|
|Married filing separately (and lived with spouse at any time during year)||< $10,000||Partial (Roth IRA Contribution Calculator)|
|Single, head of household, or married filing separately (and did not live with spouse at any time during year)||< $117,000||Full Limit|
|> $117,000 +< $132,000||Partial (Roth IRA Contribution Calculator)|
Is There An IRA or Roth IRA Minimum Contribution?
While we have just gone over information on the maximum IRA contribution and the max Roth IRA contribution, you may be wondering if there is a traditional IRA or Roth IRA minimum contribution.
There is never a minimum requirement for either type of retirement account. In fact, there are no requirements at all. You can skip years. You can stay under the maximum IRA contribution/Roth IRA max contribution each year and still keep your account.
The downside, however, is gathering less money for retirement.
What Is the IRA or Roth IRA Contribution Deadline?
Let’s switch the question now from “How much can I contribute to my IRA?” to “When can I contribute?”
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Each year has an IRA or Roth IRA contribution deadline. The maximum IRA contribution for this year has to be given to your account by tax day. For example, your traditional IRA or Roth IRA contributions for 2016 must be sent in no later than April 17, 2017.
This extended IRA and Roth IRA contribution deadline allows you extra time to get in the IRA or Roth IRA max contribution each year.
How to Maximize Your IRA Contribution
Since IRA and Roth IRA contributions are limited each year, it is important to maximize your contribution to make you the most money possible for retirement.
- Start Young: The younger you start the better. We know those in their late teens or 20s may not be concerned about retirement when they are just trying to pay their bills. But starting young could earn you hundreds of thousands of dollars toward retirement. Putting in the max contribution to Roth IRA or traditional accounts will be your future nest egg.
- Contribute Early: Don’t wait for the IRA or Roth IRA contribution deadline. Putting in the max traditional IRA or the Roth IRA max contribution each year is a great start. But if you put it in as early as possible (January of that year vs. tax day), you will have many more months to start earning and compounding your interest.
- Choose The Max: If it is possible at all for you to scrounge up the money to pay the maximum IRA contribution or the Roth IRA max contribution, do it. Not only are you putting aside more money, you are exponentially increasing your money through the investments.
- Pick The Right Account: NerdWallet’s “Best IRA Accounts: 2016 Top Picks” is a great place to start your research. You want to make sure that if you are paying the max traditional IRA or the max Roth IRA contribution, the financial institution is doing the best for your money.
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Benefit From An IRA Contribution Calculator
An online IRA contribution calculator can help you figure out your potential retirement earnings depending upon factors such as:
- Your starting balance
- Your annual contribution
- Your current age
- Your expected age of retirement
- Your adjusted gross income
- How valuable it is to not skip contribution years and to put in your maximum IRA contribution each year
- Exactly what your maximum IRA contribution is (or max Roth IRA contribution) for your income level on that year)
Now that you understand how to contribute to IRA accounts, how to contribute to Roth IRA accounts, what your maximum IRA contribution is for 2016, and what your Roth IRA max contribution is, you can either open a new account or put in your money for the year.
Then, pay attention to our four steps that maximize your IRA and Roth IRA contributions. Remember, the more you save today, the better your retirement will be in the future.
We may have answered, “How much can you contribute to an IRA?” – but now it’s time to ask yourself, “How much can I contribute to my IRA this year?” And get started today!
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