The Ins and Outs of Traditional IRA Contribution Limits

February 10, 2022

Any person planning for retirement should know that the Internal Revenue Service (IRS) limits contributions to Individual Retirement Arrangement (IRA) accounts, 401(k)s, and other tax-advantaged retirement savings plans. While different retirement plans may have different contribution limits, the reason for these restrictions is generally the same: to level the playing field across income levels. 

 

Here’s what you need to know about current traditional IRA contribution limits, why limits tend to increase every few years, and how certain financial circumstances can impact your ability to deduct contributions.

 

Maximum Annual Contribution Limits for Traditional IRAs

For traditional IRAs, two primary factors are used to determine your maximum annual contribution limit: your age and income. As of 2022, your total contribution for the year cannot exceed $6,000 if you’re under 50 years old.1 If you’re 50 or older, you can contribute up to $7,000 – the extra $1,000 is considered a catch-up contribution.

 

However, your contribution cannot exceed your taxable income for the year. So if you took a year-long unpaid leave of absence from your job but pulled in a gross income of $4,000 from a side gig, you could not contribute more than that $4,000 for that year. There are currently no minimum contribution requirements for traditional IRAs.

 

It’s important to note that contribution limits do not apply to rollover contributions. A rollover occurs when you withdraw funds from one eligible retirement account and deposit them into your IRA within 60 days.2 Generally only one rollover can be made in a one-year period.

 

What Happens if You Exceed Your IRA Contribution Limits?

If you go over the IRA contribution limit that applies to you, the excess amount will be taxed at 6% per year for every year that the money remains in the account. You can avoid the 6% tax if you withdraw the excess contributions before your income tax return due date, along with any income earned on the excess contribution.

 

Why IRA Contribution Limits Increase

Contribution limits are usually raised every few years to keep up with adjustments to the cost of living. When the traditional IRA was introduced in 1975, contributions were limited to $1,500.3 Since then, traditional IRA contribution limits have increased by about 300%. The most recent increase took place in 2019, when limits grew to where they are now from $5,500 for those under 50 years old and $6,500 for those 50 and older. This roughly tracks with inflation, the rate of which has increased about 400% since 1975.

 

Traditional IRA Deduction Limitations

Beyond the benefit of building a financial cushion for retirement, traditional IRAs offer the tax advantage of deducting contributions from your taxable income. But that deductibility may be limited depending on your income, marital status, and whether you (or your spouse, if married) is covered by a workplace retirement plan. Single or married people who are not covered by a workplace plan can earn any amount of income and still generally deduct up to their full contribution limit of $6,000 or $7,000, depending on their age.

 

Traditional IRA deductions may be reduced or eliminated if you (or your spouse) are covered by a retirement plan through your employer, such as a 401(k), and if your modified adjusted gross income (MAGI) exceeds certain levels. For 2022, you cannot deduct your traditional IRA contributions if:4

 

  • You’re a single taxpayer covered by a workplace retirement plan and your MAGI is $78,000 or more. For 2021, the amount is $76,000.
  • You’re married filing jointly, covered by a workplace retirement plan, and your MAGI is $129,000 or more. For 2021, the amount is $125,000.
  • You’re married filing jointly, you’re not covered by a workplace retirement plan but your spouse is, and your MAGI is $214,000 or more. For 2021, the amount is $208,000.
  • You’re married filing separately, covered by a workplace retirement plan, and your income is $10,000 or more. This amount is unchanged from 2021.

 

Do Roth IRAs Have Different Contribution Limits?

Although there are many differences between traditional and Roth IRAs, contribution limits are the same. In fact, they’re combined: Anyone who has both a Traditional and Roth IRA with one or more banking institutions can make a total combined contribution of up to $6,000 or $7,000, depending on age. But take note: You can only contribute to a Roth IRA if your MAGI is less than a certain amount. For example, as of 2022 a single person with a MAGI less than $129,000 can make the full contribution. The same person can make a reduced contribution if they make less than $144,000, but no contribution if their MAGI is $144,000 or greater.

The Bottom Line

IRA contribution limits can vary depending on what type of IRA you have, your income, and your filing status. For most individuals under 50 years of age, the maximum traditional IRA contribution limit is $6,000. Over-contributing can result in penalties, so it’s wise to double check that you haven’t already reached your annual limit before making a contribution.

Related Articles

 

 

 

 

Accounts offered by American

Express National Bank. Member FDIC. Each depositor is insured to at least $250,000.

Learn More from FDIC.gov

*The Annual Percentage Yield (APY) as advertised is accurate as of . Interest rate and APY are subject to change at any time without notice before and after a High Yield Savings Account is opened.

 

For a CD account, rates are subject to change at any time without notice before the account is opened. Your rate will be fixed on the business day‡ we receive your completed application, provided we receive your deposit within 30 days after your application is approved. After a CD is opened, additional deposits to the account are not permitted. Early CD withdrawals may be subject to significant penalties which could cause you to lose some of your principal. Please see the Deposit Account Agreement for additional terms and conditions and Truth-in-Savings disclosures.

 

**The national rate referenced is from the FDIC's published Monthly Rate Cap Information for Savings deposit products. Visit the FDIC website for details.

 

‡For purposes of transferring funds, business days are Monday through Friday, excluding holidays. Transfers can be initiated 24/7 via the website or phone, but any transfers initiated after 7:00 PM Eastern Time or on non-business days will begin to be processed on the next business day.

 

♢Calculations are estimates of expected interest earned. Actual results may vary, based on various factors such as leap years, timing of deposits, rounding, and variation in interest rates. The first recurring deposit is assumed to begin in the second period after any initial deposit.

 

§IRA Contributions are subject to aggregate annual limits across all IRA plans held at American Express or other institutions. IRA distributions may be taxed and subject to penalties based on IRS guidelines. Required minimum distribution, if applicable, is only relevant to this IRA plan and does not take into consideration other IRA plans held at American Express or other institutions. Please see IRS.gov for more information. We recommend you consult with a financial or tax advisor when making contributions to and distributions from an IRA plan account.