IRA Contribution Limits for 2023 and 2024

The limit for annual contributions to Roth and traditional individual retirement accounts (IRAs) for the 2023 tax year is $6,500 and $7,500 if you're age 50 or older. For tax year 2024, those figures are $7,500 and $8,000, respectively.

However, there are restrictions that could affect how much you can contribute and what you can deduct on your tax return.

IRA Contribution Limits

As noted above, the most you may contribute to your Roth and traditional IRAs for the 2023 tax year is:

• $6,500 if you're younger than age 50
• $7,500 if you're aged 50 or older

For the year 2023, you may contribute:

• $7,000 if you're younger than age 50
• $8,000 if you're aged 50 or older

You Can Only Contribute Earned Income

You must have enough earned income to cover your contribution to an IRA. If your earned income for the year is less than the contribution limit, you can only contribute up to your earned income. For example, if you earned $3,000, you can contribute a maximum of $3,000.

There are two ways to get earned income, as defined by the Internal Revenue Service (IRS). You can work for someone else who pays you, or you can make money working for yourself. Earned income includes money from wages, salaries, tips, bonuses, commissions, and self-employment income.

The IRS also considers disability retirement benefits as earned income until you reach the age at which you could have received a pension or annuity if you didn't have a disability.

Money That Isn't Earned Income

Some types of income don't count as earned income, including:

• Child support
• Income from rental property
• Interest and dividends from investments
• Pay you received while an inmate in a penal institution
• Retirement income
• Social Security
• Unemployment benefits

Alimony, which represents court-ordered payments to a spouse in a divorce agreement, typically does not count as earned income that can be contributed to an IRA. However, taxable alimony is counted as earned income if the divorce agreement was signed on or before Dec. 31, 2018.

Spousal IRAs

If you don't have earned income, but your spouse does, you can open what's called a spousal IRA. These accounts allow a person with earned income to contribute on behalf of a spouse who doesn't work for pay.

You can structure a spousal IRA as a traditional or Roth IRA. Either way, the spouse with earned income can contribute to the IRAs of both spouses, assuming there is enough earned income to cover both contributions.

Roth IRA Income Limits

You can contribute to a traditional IRA regardless of how much money you earn. But you're not eligible to open or contribute to a Roth IRA if you make too much money.

Here's a rundown of the 2023 and 2024 Roth IRA income and contribution limits, based on your filing status and modified adjusted gross income (MAGI):

There are ways around the Roth IRA contribution limits for those who want to open an IRA. If you make a contribution to a nondeductible IRA, you can then convert it to a Roth IRA. The same applies to nondeductible contributions made to a 401(k) plan.

If you're uncertain about your specific circumstances, check with a qualified tax professional.

Traditional IRA Deduction Limits

Unlike Roth IRAs, income doesn't limit contributions to traditional IRAs. And you can deduct your contributions in full if you and your spouse don't have a 401(k) or some other retirement plan at work.

If either one of you is covered by a plan at work, however, the deduction may be reduced or eliminated. Below is the full rundown of IRA deduction limits for tax years 2023 and 2024.

Modified Adjusted Gross Income (MAGI)

The IRS uses your MAGI to assess your IRA limits. This number can be close (or identical) to your adjusted gross income (AGI). It takes your AGI and adds back certain deductions, including:

• Half of any self-employment taxes
• IRA contributions and Social Security
• Losses from a publicly traded partnership
• Passive income or loss
• Qualified tuition expenses
• Rental losses
• Student loan interest
• The exclusion of adoption expenses
• The exclusion for income from U.S. savings bonds
• Tuition and fees

To calculate your MAGI, find the AGI from your tax return—it's on line 11 of the newly redesigned Form 1040. Then, use Appendix B, Worksheet 1 from IRS Publication 590-A, to modify your AGI for IRA purposes.

Excess IRA Contributions: If You Contribute Too Much

It's good to max out your IRA contributions. But if you go overboard, the IRS considers it an ineligible or excess contribution. If you contribute too much or you contribute to a Roth when your income is too high, you'll owe a 6% penalty on the excess contribution each year until you fix the mistake.

The good news is that there are several ways to fix your mistake:

• Withdraw the excess contribution (and any earnings on it) before the April tax deadline.
• If you've already filed your tax return, remove the excess contribution (and earnings) and file an amended tax return by the October deadline.
• Apply the excess to next year's contribution. You'll still pay the 6% penalty this year, but you'll be set going forward.
• Withdraw the excess next year by Dec. 31. You'll pay the penalty for two years and then move on.
  

The Saver's Credit

People with low-to-moderate incomes may be eligible for the saver's credit, a dollar-for-dollar reduction of the taxes you owe. This credit has existed since the early 2000s.

You could earn a credit of 10%, 20%, or 50% of your contributions up to a dollar amount of $2,000 ($4,000 if married and filing jointly) as long as you're eligible.

The?saver's credit?is available to individuals, heads of households, and joint filers who contribute to an IRA, 401(k), or any other qualified retirement account and whose AGI falls within certain parameters. You must also be over 18, not a full-time student, and not listed as a dependent on anyone else's tax return.

The income thresholds are adjusted annually. Here are the saver's credit rates for 2023 and 2024:

A married couple with an AGI of, say, $60,000 could save $400 on their 2023 tax bill by contributing $2,000 to each ($4,000 total) of their IRAs (the 10% level). If they managed to contribute $4,000 with an income below $43,500, their tax credit would be $2,000 (50% of their contributions).

Special Considerations

Contribution limits apply to other types of IRAs, such as Simplified Employee Pension (SEP) IRAs, Savings Incentive Match Plan for Employees (SIMPLE) IRAs, and solo 401(k) plans.

These three varieties of retirement savings plans are all designed for small businesses. They have similarities, but the solo 401(k) is the only one that can be created as a Roth account rather than a traditional account.

Keep in mind, though, that the contribution limits and deferral amounts for these accounts are not the same:

• For self-employed individuals and small business owners, the contribution limit each for SEP IRAs and solo 401(k) plans cannot exceed 25% of compensation, up to $66,000 for 2023 and $69,000 for 2024.
• If you have a SIMPLE IRA, you can make salary deferrals (salary reduction contributions) up to $15,500 for 2023 and $16,000 for 2024. If you're age 50 or older, you can add an extra $3,500 for 2023 as well as for 2024.

The solo 401(k) combines the profit-sharing component of a SEP IRA with the salary deferral and catchup features of a 401(k) account. The plan you choose depends on your cash flow and whether you have employees.

The maximum elective deferral for a one-participant 401(k) plan for 2023 is $22,500 ($30,000 for people 50 and over with the catch-up contribution). It's $23,000 ($30,500) for 2024. The catch-up contribution for 2023 and 2024 is $7,500.

The Bottom Line

Any type of IRA is an excellent way to save for retirement. To take full advantage of these accounts—and avoid any trouble or penalties—be sure to follow the rules for contribution, income, and deduction limits. The limits change periodically, so check back each year to make sure you comply.