IRA Contribution Limits for 2020 (Roth and Traditional)

Saving for retirement can be confusing. There are so many options to consider and even more rules. How much are you allowed to save? What type of account should you invest in? What kind of return will you get?

Today, we’ll review Individual Retirement Accounts, better known as IRAs. These popular retirement accounts are easy to open and offer a variety of tax benefits. We’ll break down how they work, review the IRA contribution limits, and take a look at the exclusions for two types of IRAs – traditional and Roth.

Let’s get started!

What Is an IRA?

An IRA is a tax-advantaged investment account used to save money for retirement. Depending on the type of IRA, money in the account grows either tax-free or tax-deferred. Funds can be accessed without penalty if withdrawn after age 59 1/2. While there are different IRAs available, such as traditional, Roth, SIMPLE, and SEP plans, this piece will cover contribution limits specific to traditional and Roth IRAs.

2020 IRA Contribution Limits at a Glance

• Contributions for the 2019 and 2020 tax year are capped at $6,000 if you’re under 50.
• You can contribute up to $7,000 if you’re 50 or older by the deadline.
• The IRS extended this year’s federal filing and payment deadline to July 15.
• You can contribute to both traditional and Roth IRAs, but your total contributions cannot exceed the limits.
• Contribution limits do not apply to rollover contributions or qualified reservist payments.
• Roth IRA contribution limits may be impacted by modified adjusted gross income.
• Contributions for the 2019 tax year must be designated as such or they will be applied to 2020
• Your contribution age is based on your age on the last day of the tax year.

As noted above, for 2020 the IRS extended this year’s federal filing and payment deadline to July 15 due to the COVID-19 pandemic. That means you’ll get an extra three months longer than usual to make contributions for the 2019 tax year. While contribution limits for IRAs haven’t increased, the extension provides an additional three-month window to hit the savings sweet spot.

Contribution Limits for a Traditional IRA

For traditional IRAs, your 2019 and 2020 contributions can not exceed $6,000 per year if you’re under 50 years old. If you are 50 or older, you are allowed to make a “catch-up contribution” of $1,000 for a total contribution limit $7,000. These figures reflect an increase to IRA contribution limits imposed since 2015, with prior limits of $5,500 and $6,500 respectively.

You can contribute to a traditional IRA if you or your spouse (if filing jointly) has taxable income, regardless of modified adjusted gross income (MAGI). In addition, as of January 1, 2020, you can make contributions even if you are 70½ or older. Be advised that your MAGI will impact how much you can deduct. You can review the Internal Revenue Service’s (IRS) Contributions to Individual Retirement Arrangements publication for greater detail.

Contributions to a traditional IRA are made “pre-tax”, thus they are tax-deductible now. Growth on the money is tax free, however you will be charged tax when you take distributions on the money. The hope is that your tax rate will be lower in retirement than it is during your prime earning years, thus reducing the amount of tax you pay on these funds.

Contribution Limits for a Roth IRA

Roth IRA contributions are made after income taxes have been deducted, so they are not considered tax-deductible. However, they do offer additional advantages such as completely tax-free distributions when you meet IRS requirements for withdrawals.

In general, if you’re 49 years old or younger, you can contribute up to $6,000 to a Roth IRA. If you’re 50 or older, you can contribute up to $7,000, but there are some exceptions that can bar you from hitting the maximum contribution limit. For Roth IRAs, these restrictions are driven by MAGI as follows for 2019 and 2020.

How to Determine the Reduced Roth IRA Contribution

To calculate a reduced contribution limit, you’ll first need to know your MAGI. Next, you will make subtractions from your MAGI based on your 2019 or 2020 filing status as follows:

• First, subtract $193,000 (2019) or $196,000 (2020) if married filing jointly or a qualified widow or widower
• Then, subtract $10,000 (2019 and 2020) if you are married filing separately and lived with your spouse during the tax year
• Finally, subtract $122,000 (2019) or $124,000 (2020) for all other filing statuses (single, head of household)

Next, you will divide the result by $15,000 ($10,000 if you are married filing jointly, a qualified widow or widower, or married filing separately and have lived with your spouse during the tax year). Then you will multiply the result by the maximum contribution limit (based on age). Finally, you will subtract this result from the maximum contribution limit. This figure is your reduced contribution limit.

Here’s a scenario to see how that calculation could work:

Charles is 52 years old and has a MAGI of $197,000 for 2019. He is married filing jointly. After subtracting $193,000, he is left with $4,000. After dividing $4,000 by $10,000, his result is $0.4. Charles is over the age of 50, so his age-based IRA contribution limit is $7,000. He will multiply $7,000 by $0.4 to get $2,800. He will then subtract $2,800 from $7,000. His contribution limit for 2019 is $4,200.

Exclusions on Contributions

Contributing to an IRA has many advantages, but there are also exclusions to consider.

• You Can Only Contribute From a Taxable Income Source — To contribute to an IRA, you must report “earned income.” This includes money you earned from wages, salaries, tips, commissions, bonuses, or net income from self-employment.
• You Can’t Contribute More Than You Earn — You may not contribute more than your earned income for the relevant tax year or the established limits based on age, whichever is smaller.
• Non-Working Spouses Must Have a Spouse Earning Enough to Cover Contributions — A non-working spouse can contribute to a Spousal IRA as long as the working spouse has taxable earned income. The amount of combined IRA contributions in a tax year cannot exceed your total taxable income.

Final Thoughts on 2020 IRA Contributions

Preparing for retirement is a worthwhile venture. Thankfully, you can use vehicles such as IRAs and employer-offered plans such as a 401(k) to help you build a living wage for your retirement years. Knowing the contribution limit allows you to create a plan to save the maximum amount, enjoy qualified deductions, and avoid tax penalties for unqualified contributions.

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