Nearly half of respondents to a 2020 TD Ameritrade survey admitted they have less than $100,000 saved for retirement. If you’re worried that you might be falling short of your retirement goals, it’s not too late to start tax-deferred and deductible savings using a traditional individual retirement account.
But before you start socking away money, there are a few things you need to know about IRA contribution limits based on earned income. Keep reading to learn more.
What Counts as Traditional IRA Contributions
Your IRA contribution limits and income are connected. In almost all cases you must have earned income if you plan to contribute to an IRA, but you can only contribute so much each year.
You’ll need to determine if your IRA contribution limits by year are affected by your earned income. According to the IRS, earned income includes the following:
- Wages, salaries and tips
- Net earnings from self-employment
- Taxable alimony
Good To Know
You don’t have to consider interest, dividend or property income when you determine your IRA contribution limits based on income. Additionally, pension income and annuity income are not considered earned income.
How Much Can You Contribute to an IRA in 2021?
IRA contribution limits for 2021 are the same as the previous two years. Individuals younger than 50 years old can contribute $6,000 to both traditional and Roth IRAs. Those 50 and older can contribute $7,000.
You are allowed to have both traditional and Roth IRAs, but if you are looking to deduct contributions from your taxes, the traditional IRA is the way to go because Roth IRA contributions are not deductible.
Although most people must have earned income before they can contribute to an IRA, there is an exception known as a spousal IRA. If you file jointly and your taxable compensation is less than your spouse’s earnings, you can still contribute to the IRA. That rule applies even if you don’t have any income.
If you are covered by a retirement plan at work, take a look at this 2021 IRA contribution limits chart, which indicates how much of a deduction you can receive based on filing status and modified adjusted gross income:
|Filing Status||Partial Deduction If Income Is:||No Deduction If Income Exceeds:|
|Single, head of household, or married filing separately if you didn’t live together during the year||Over $66,000 but less than $76,000||$76,000|
|Married filing jointly or qualifying widow(er)||Over $105,000 but less than $125,000||$125,000|
|Married filing separately if you lived with your spouse during the year||Less than $10,000||$10,000|
If you’re not covered by a workplace retirement plan, you can get a full deduction regardless of income if you are among the following:
- Head of household
- Qualifying widow(er)
- Married filing jointly or separately with a spouse not covered by a plan at work
If you are married filing jointly with a spouse who is covered by a plan at work, you receive:
- A full deduction if your adjusted gross income is $198,000 or less
- A partial deduction if your AGI is more than $198,000 but less than $208,000
- No deduction if your AGI is $208,000 or higher
As soon as you open your traditional IRA, you can begin making contributions. If you make more than the allowable contribution to your IRA in a year, you can apply the overage to the next tax year. Penalties may be assessed if you make an excess contribution.
What You Need To Know
Some people can receive up to a 50% tax credit for making eligible IRA contributions. The maximum credit offered through the Saver’s Credit program is $2,000 for individuals, or $4,000 if you are married filing jointly. An IRS chart can help you determine if you are eligible.
IRA rules for 2021 include positive changes for the average taxpayer, including slightly higher income limits for making contributions.
One of the best things about a traditional IRA is that it can lower your taxable income. This can result in great tax savings each year. For example, a single taxpayer under 50 years of age can deduct the $6,000 traditional IRA contribution from taxable income. If you have an income of $60,000, this deduction reduces your taxable income to $54,000. At a tax rate of 22%, the deduction shaves $1,320 off of your federal taxes.
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