When it comes to saving for retirement, one popular option is a Roth IRA. A Roth IRA (Individual Retirement Account) allows individuals to contribute after-tax income and enjoy tax-free growth on their investments. However, there are certain limits and guidelines that govern how much you can contribute each year. In this article, we will discuss the top 10 things you need to know about Roth IRA contribution limits.
1. Contribution Limit
For the year 2021, the maximum contribution limit for a Roth IRA is $6,000 if you are under 50 years old. If you are aged 50 or older, you can make an additional catch-up contribution of $1,000, bringing the total limit to $7,000.
2. Income Limits
While there’s no upper age limit for contributing to a Roth IRA, there are income limits that determine whether or not you’re eligible to contribute the full amount. For single filers in 2021, eligibility begins to phase out at an adjusted gross income (AGI) of $125,000 and is completely phased out at $140,000. For married couples filing jointly, the phase-out range starts at an AGI of $198,000 and ends at $208,000.
3. Backdoor Roth Conversion
If your income exceeds these limits but you still want to contribute to a Roth IRA, there is another option known as a backdoor Roth conversion. This involves making nondeductible contributions to a traditional IRA and then converting them into a Roth IRA.
4. Spousal Contributions
Even if one spouse does not have earned income or has a low-income level compared to their partner’s higher earnings potential; they can still contribute up to the maximum allowed amount based on their joint household earnings.
5. Age Limitations for Contributions
Unlike traditional IRAs that have required minimum distributions (RMDs) starting at age 72 in order to avoid penalties, Roth IRAs have no age limit for making contributions. As long as you have earned income, you can continue contributing to a Roth IRA indefinitely.
6. Employer Retirement Plans
If you have access to an employer-sponsored retirement plan such as a 401(k) or 403(b), it may affect your ability to contribute the full amount to a Roth IRA. The income limits mentioned earlier apply only if you are not covered by such a plan. If you are covered by an employer’s retirement plan, your eligibility depends on your modified adjusted gross income (MAGI).
7. Deadline for Contributions
The deadline for making contributions to a Roth IRA coincides with the tax filing deadline, which is typically April 15th of the following year. However, due to COVID-19 and its impact on taxes, the IRS extended the tax filing deadline for 2020 contributions until May 17th, 2021.
8. Excess Contributions
Contributing more than the allowed limit can result in excess contributions that need to be corrected promptly to avoid penalties and potential taxes on earnings from those excessive amounts.
9. Withdrawals and Penalties
Withdrawing funds from your Roth IRA before reaching age 59½ may subject you to early withdrawal penalties unless certain exceptions apply (e.g., first-time homebuyer expenses or qualified education expenses). However, since contributions were made with after-tax dollars, they can be withdrawn at any time without penalty.
10. Coordinating with Other Retirement Accounts
It’s important to consider how your contribution limits across various retirement accounts interact with each other when planning your overall retirement savings strategy. For example, if you contribute $4,000 towards a traditional IRA in one year, that reduces the maximum amount you could contribute towards a Roth IRA that same year.
In conclusion, understanding the contribution limits associated with a Roth IRA is essential for effective retirement planning. By knowing these limits and guidelines, you can make informed decisions about how to maximize your retirement savings while taking advantage of the tax benefits offered by a Roth IRA. Always consult with a financial advisor or tax professional for personalized advice based on your specific circumstances.