A traditional IRA is a tax-advantaged investment account that helps individuals save for their retirement. The contributions a person makes are typically fully or partially tax-deductible, and the money inside the account grows tax-deferred. Individuals are taxed at regular income tax rates when they make withdrawals after age 59 ½ .
Depending on an individual’s circumstances, there are limits to how much one can contribute to a traditional IRA, and who can deduct their contributions.
Here’s a look at what you need to know about contributions to your IRA.
What Is the Traditional IRA Income Limit?
Traditional IRAs have no income limit. In other words, no matter how much money you make, you can contribute to a traditional IRA.
By contrast, Roth IRAs do have income limits. According to the IRS , for 2021, individuals who file their taxes as a single filer cannot contribute to a Roth IRA at all if their adjusted gross income (AGI) is $140,000 or more. Those who are married filing jointly with an AGI of $208,000 or more are also not allowed to contribute.
IRA Tax Deduction Limit
While income doesn’t determine eligibility to contribute to a traditional IRA, it can have an impact on deductible contributions if an individual or their spouse has a retirement plan at work and their income exceeds a certain level.
This chart outlines traditional IRA contributions limits in 2021 if you are covered by an employer-sponsored retirement plan .
|Filing Status||Adjusted Gross Income||Deduction Amount|
|Single||$66,000 or less||Full deduction|
|Between $66,000 and $76,000||Partial deduction|
|$76,000 or more||No deduction|
|Married filing jointly||$105,000 or less||Full deduction|
|Between $105,000 and $125,000||Partial deduction|
|$125,000 or more||No deduction|
|Married filing separately||Less than $10,000||Partial deduction|
|$10,000 or more||No deduction|
Individuals who are not covered by an employer sponsored retirement plan but have a spouse who is, are also subject to a phase out for contribution deduction.
|Filing Status||Adjusted Gross Income||Deduction Amount|
|Married filing jointly with a spouse covered by a workplace retirement plan||$198,000 or less||Full deduction|
|Between $198,000 and $208,000||Partial deduction|
|$208,000 or more||No deduction|
|Married filing separately with a spouse covered by a workplace retirement plan||Less than $10,000||Partial deduction|
|$10,000 or more||No deduction|
Contributing if You Are Over the Limit for Deductible Contributions
Individuals can still contribute to a traditional IRA if their income exceeds the limits for deductible contributions. Though they will not get an immediate tax benefit, their contributions will still grow tax-deferred, which can help boost retirement savings.
In some cases, individuals may want to make nondeductible contributions to a traditional IRA because they plan to make a backdoor contribution to a Roth IRA. With a backdoor Roth IRA, those whose income is too high to contribute to a Roth directly may be able to execute a rollover, contributing to a Roth by rolling over funds into the account from a traditional IRA.
Recommended: Rollover IRAs vs Traditional IRAs
What Is the Traditional IRA Contribution Limit?
The IRS limits the amount of money you can put into your traditional IRA account each year. For 2021, contributions are capped at $6,000. Individuals age 50 and older can make an additional $1,000 catch-up contribution for a total of $7,000.
One note: if an individual’s taxable income is less than the contribution limit, they may only contribute up to that amount. For example, if an individual earned $4,000, they could only contribute as much as $4,000 to their traditional IRA.
Earned Income and Contributions
Contributions to traditional IRAs must be made with earned income paid to you by an employer or earned as the owner of a business. The following are IRS-approved sources of earned income:
• Wages, salaries, and tips from which federal income taxes are withheld
• Income from a job from which an employer did not withhold taxes, such as freelance work
• Self-employed income
Income that does not qualify as earned income includes:
• Interest and dividends
• Pensions or annuities
• Social Security benefits
• Unemployment benefits
• Child support
• Pay earned as an inmate in a prison
Alternatives to Traditional IRAs
Roth IRAs are one common alternative to traditional IRAs. Unlike their traditional counterparts, contributions to Roths are not tax-deductible, but are made with after-tax earnings. Funds inside the account grow tax-free, and they are not subject to income tax once they are withdrawn after age 59 ½ . Roth IRAs do not have the same requirement minimum distributions rules that traditional IRA accounts holders must follow when they reach age 72. In fact, individuals with Roths can keep money in the account for as long as they live.
Roth IRAs are subject to the same contribution limits as traditional IRAs. In fact, individuals can hold both traditional and Roth accounts, but contributions are cumulative and must not exceed in total $6,000 or $7,000 for those age 50 and older in 2021.
If choosing between a Roth vs. traditional IRA, individuals may wish to consider what their expected tax bracket will be when they retire. If they think they will be in a higher tax bracket, it may make sense to save in a Roth that allows for tax-free withdrawals.
There are other types of IRAs that can help individuals save more, including SEP IRAs and SIMPLE IRAs, both of which allow self-employed people and small business owners to provide a retirement account for themselves and their employees.
Interest in learning more about IRAs? Check out these frequently asked questions about IRAs.
Excess IRA Contributions
Mistakes happen: From time to time individuals may accidentally make excess contributions to their IRAs. For instance, they could either deposit more than the annual contribution limit or make a mistake while rolling over funds.
This error can be costly. Excess funds are taxed at 6% for each year they remain in the IRA. However, individuals can avoid this tax by withdrawing excess contributions by the due date of their individual tax return. They must also withdraw any income earned on the excess funds during that period.
Opening a Retirement Account
If you’re interested in opening a retirement account you can choose a provider, which can include banks, online banks, and brokerage firms. Each provider will have a slightly different set of steps they’ll require to open an account.
When opening your first IRA, you will be asked to choose between a traditional or Roth IRA, and you’ll also be expected to fill in some personal information, such as name, date of birth, Social Security number, and contact information.
Traditional IRAs have contribution and income limits to prevent the very wealthy from benefiting too much from tax-advantaged accounts. For the rest of us, they offer an important part of retirement planning. They can help individuals boost retirement savings, even those for whom deductible contributions are phased out.
What’s more, contribution limits for traditional and Roth IRAs are cumulative, and the two types of accounts can be used in tandem, which can help individuals plan for tax efficient withdrawals when they retire.
Ready to take the next step in your retirement planning? The SoFi Invest® investment account offers active or automated Traditional, Roth, and SEP IRAs.
Photo credit: iStock/PeopleImages
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.