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Individual Retirement Accounts (IRAs) are a popular way for individuals to save for retirement, providing tax advantages and potential for growth. However, there are limits to how much you can contribute to an IRA each year. It is essential to understand these limits to make the most of your retirement savings strategy.
For the year 2021, the maximum amount an individual can contribute to their IRA is $6,000 if they are under the age of 50. This is commonly referred to as the “traditional” or “Roth” IRA contribution limit. For individuals aged 50 and older, they are eligible to make an additional catch-up contribution of $1,000, bringing their total allowed contribution to $7,000.
It is important to note that the contribution limit is per individual, not per account. This means that if you have multiple IRAs, the combined total contribution should not exceed the limit mentioned earlier. For instance, if you have both a traditional and a Roth IRA, you cannot contribute $6,000 to each account; the total combined contributions to both accounts should not exceed the limit.
There are a few factors that can affect your ability to contribute the maximum amount to your IRA. One of these factors is your income level. If you have a high income, you may be subject to certain limitations or restrictions on your IRA contributions.
For those who participate in a retirement plan at work, such as a 401(k), there are income limits that determine whether you can make deductible contributions to a traditional IRA. In 2021, if you are covered by a workplace retirement plan and your modified adjusted gross income (MAGI) is $66,000 or less as a single filer, or $105,000 or less as a married couple filing jointly, you can make a fully deductible contribution to a traditional IRA.
If your income exceeds these limits but is still below $76,000 as a single filer or $125,000 as a married couple filing jointly, you may be eligible for a partial deduction. Above these income thresholds, your contributions to a traditional IRA may not be tax-deductible.
For those who do not participate in a workplace retirement plan but are married to someone who does, the income limits for a fully deductible traditional IRA contribution are higher. The MAGI limit for a married couple filing jointly is $105,000 to $125,000, and for a partial deduction, it is $125,000 to $140,000.
On the other hand, Roth IRAs have income limits that determine eligibility. In 2021, individuals with a MAGI of $125,000 or less as a single filer, or $198,000 or less as a married couple filing jointly, can make a full Roth IRA contribution. Above these income limits, the ability to contribute to a Roth IRA is gradually reduced until it is completely phased out.
It is crucial to keep track of your income and understand how it impacts your IRA contributions. If you exceed the income limits for deductible traditional IRA contributions or Roth IRA contributions, there are alternative retirement savings vehicles that you can explore, such as a non-deductible traditional IRA or a taxable brokerage account.
In conclusion, the maximum amount you can contribute to your IRA in 2021 is $6,000 if you are under 50, or $7,000 if you are 50 or older. However, income limits can affect your ability to contribute the maximum amount or make deductible contributions. Consulting a financial advisor or tax professional can help you navigate these limits and make informed decisions about your retirement savings.
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