Many taxpayers contribute to a traditional IRA to lower their taxable income as the tax deadline approaches. If you are considering doing so, it is important to know the eligibility requirements. If you don't, the Internal Revenue Service (IRS) may assess an excess contribution penalty. Here are some important reminders.
Key Takeaways
- Retirement accounts such as IRAs make saving for retirement easier and tax-efficient.
- There are deadlines for when IRA contributions can be made and for how much you can contribute into an IRA.
- You can only contribute earned income to an IRA, including salaries and net earnings from your business.
- The maximum contribution is $6,500 for 2023 and $7,000 for 2024.
- Taxpayers 50 and over can make a catch-up contribution of an additional $1,000.
Eligible Compensation
You must first have eligible compensation to contribute to an IRA. The IRS calls this earned income. This includes wages, salaries, tips, sales commissions, taxable alimony, or maintenance payments received under a divorce decree or separation agreement.
If you are self-employed (as a sole proprietor or partner), eligible compensation includes net earnings from your business, minus contributions made to any retirement plan, and the deduction allowed for self-employment taxes.
Not all income qualifies. Rental income, interest, dividends, pension, or annuity income, as well as deferred compensation payments and any amounts you exclude from your income, are not considered eligible compensation for IRA purposes.
If you are married and do not have eligible compensation, you may be able to make a spousal IRA contribution. Couples must file a joint tax return to take this option.
Maximum Contribution
The maximum allowable IRA contribution is $6,500 for 2023 and $7,000 for 2024. Taxpayers at least 50 years of age in the year for which the contribution applies can also make a catch-up contribution of an additional $1,000.
If your eligible compensation is less than the limit (inclusive of any catch-up contribution limit you may be eligible for), then you are permitted to contribute only up to the amount you earned for the year.
Here's a hypothetical example to show how this works. Let's say Adam is a full-time college student who earned $2,000 from his part-time job in 2023. He also earned $1,500 in dividends and interest on his investments. Adam can contribute only $2,000 to his IRA because that is the amount he earned in eligible compensation.
Age Limitation
Previously, taxpayers who were 70½ years of age or older could not contribute to a traditional IRA. However, as of January 1, 2020, this age limit no longer applies. This greatly helps individuals save towards retirement, as people are living longer and thus working longer.
Income Limitation
The contribution limit is reduced for high-income earnings, and individuals making too much money are not eligible to contribute to a Roth IRA. Your contribution limit is determined by your modified adjusted gross income (MAGI) and tax filing status.
Roth IRA - 2023 Income Limits
- Single taxpayers earning between $138,000 and $153,000 may contribute a phased-out, reduced contribution amount.
- Single taxpayers earning more than $153,000 are not eligible to contribute.
- Married filing joint taxpayers earning between $218,000 and $228,000 may contribute a phased-out, reduced contribution amount.
- Married filing joint taxpayers earning more than $228,000 are not eligible to contribute.
- Married filing separate taxpayers earning between $0 and $10,000 may contribute a phased-out, reduced contribution amount.
- Married filing separate taxpayers earning more than $10,000 are not eligible to contribute.
Roth IRA - 2024 Income Limits
- Single taxpayers earning between $146,000 and $161,000 may contribute a phased-out, reduced contribution amount.
- Single taxpayers earning more than $161,000 are not eligible to contribute.
- Married filing joint taxpayers earning between $230,000 and $240,000 may contribute a phased-out, reduced contribution amount.
- Married filing joint taxpayers earning more than $240,000 are not eligible to contribute.
- Married filing separate taxpayers earning between $0 and $10,000 may contribute a phased-out, reduced contribution amount.
- Married filing separate taxpayers earning more than $10,000 are not eligible to contribute.
Contribution Deadline
Taxpayers typically have until the income tax filing deadline to make an IRA contribution for the prior tax year. Deadlines for SEP IRA contributions work a bit differently. Taxpayers can make a SEP IRA contribution as late as the due date (including extensions) of the return. So in a typical year, if you file for a six-month extension, you would have until the middle of October to contribute.
Similar to your tax return, the postmark date is considered timely. If you are sending your IRA contribution to your financial institution by mail, make sure the envelope is postmarked by the appropriate deadline.
When sending a check to fund an IRA contribution, be sure to write the applicable tax year in the memo field. Otherwise, your financial institution could apply the contribution to the incorrect tax year.
Military Personnel Exception
If you are a member of the armed forces who served in a combat zone or provided qualifying services outside of a combat zone, you receive an automatic extension for making your IRA contribution. The extension is usually 180 days after one of the following:
- The last day you serve in a combat zoneor complete your qualifying service outside a combat zone
- The last day you serve in a contingency operation
- The last day of any continuous qualified hospitalization for injury from service in either of the above
Make sure your financial institution knows the year to which your contribution applies and ask about their documentation requirements for contributions made during your extension period.
Can I Open an IRA If I Have a 401(k)?
Yes, individuals may have both an IRA and a 401(k). A 401(k) is a retirement account offered through your employer; your work manages the relationship with the provider and may make matching contributions. You are responsible for opening and maintaining an IRA on your own. Having one account does not limit the contribution amount or eligibility of the other.
Can I Contribute to an IRA If I Have High Income?
Roth IRAs are subject to contribution limits. For 2023, single taxpayers must have a MAGI under $153,000 to be eligible to contribute. Married filing joint taxpayers must have a MAGI of under $228,000. For 2024, the limit is $161,000 for single taxpayers, and $240,000 for those who are married and filing jointly.
In addition, traditional IRA contributions have a phase-out range for tax deductibility. You can still make these contributions; you just won't be able to deduct the contributions on your taxes if you exceed those limits.
Can I Contribute to an IRA If I'm Not Working?
In general, if you aren't making earned income, you usually can't contribute to a traditional or Roth IRA. There may be situations where individuals filing a joint return with their spouse may be able to make contributions based on combined taxable income reported on their return.
The Bottom Line
Check to make sure you meet the eligibility requirements and that you received eligible compensation for the year before you make your IRA contribution. To be sure that your contribution was deposited for the right tax year, check your account statement for the month the amount is deposited.
Financial institutions are more likely to correct processing errors if the errors are detected early. And most importantly, check with your tax and financial professional for assistance with determining whether contributing to your IRA is a good financial decision for you.
