How does the max IRA contribution work?
The maximum IRA contribution is an annual amount that you are allowed to contribute to your IRA. If you are under the age of 50, you can make IRA contributions that total up to $6,000. If you are age 50 or older, you can contribute an additional $1,000 each year.
What is the maximum IRA contribution in 2019?
For 2019, the maximum IRA contribution limits for traditional IRAs and Roth IRAs are $6,000 for people who are younger than age 50. For people who are age 50 or older, the IRA contribution limits are $7,000 per year. For highly compensated employees or HCEs, the minimum will increase by $5,000 in 2019 to $125,000.
SIMPLE IRAs have higher contribution limits than traditional or Roth IRAs. However, the SIMPLE IRA contribution limits are lower than they are for 401(k) plans. In 2019, the SIMPLE IRA contribution limits are $13,000. The SEP IRA contribution limits are $56,000 in 2019.
What are the different types of IRAs?
There are several different types of IRAs, including the following:
- Traditional IRAs
- Roth IRAs
- SIMPLE IRAs
Traditional IRAs are individual accounts that offer tax benefits to people for retirement. You make contributions to a traditional IRA on a pre-tax basis and can deduct them on your income tax return.
A Roth IRA is a type of retirement account that you fund with after-tax dollars. When you open a Roth IRA and contribute to it, your future withdrawals will be free of tax as long as they comply with the IRS regulations.
A simplified employee pension individual retirement arrangement or SEP-IRA is a type of employer-sponsored retirement plan. If you are self-employed, you can open a SEP-IRA and make contributions to it.
A savings incentive match plan for employees or a SIMPLE IRA is a plan that is sponsored by an employer. It is designed to meet the needs of smaller companies that have fewer than 100 employees. However, the SIMPLE IRA contribution limits are lower than the contribution limits for 401(k) and 403b accounts. For example, the 403b contribution limits 2018 were $18,500 for people who are younger than age 50. In 2019, they have increased to $19,000.
In 2018, one-third of the U.S. households owned individual retirement accounts. More than 80% also had employer-sponsored plans through their employers. According to the Teachers Insurance and Annuities Association, 45% of people in the U.S. think that IRAs are too difficult to understand, leading them not to contribute to them.
What changes are there in 2019 for the maximum IRA contributions?
Per the IRS contribution limits, your maximum IRA contributions in 2019 for both traditional and Roth IRAs are $6,000 if you are under age 50 and $7,000 if you are 50 or older. If you have both of these types of IRAs, the total amount that you contribute to them cannot exceed these limits. If you will earn less than the maximum limits, you can contribute your taxable compensation for the year. You are not allowed to contribute more money than you earn. If you make excess contributions, they will be taxed at 6% per year for as long as they remain in your IRA.
The SEP-IRA limits count toward your combined traditional and Roth IRA contribution limit of $6,000 for the year. Your employer contributions are limited to 25 percent of your compensation or $56,000, whichever is less. Employers must contribute to all eligible employees’ accounts and at the same percentage any year they fund their SEP.
The SIMPLE IRA limits are $13,000 for those who are younger than 50. A catch-up contribution of $3,000 is available to those who are 50 or older, making the total $16,000. These IRA contribution amounts are $500 higher than they were in 2018.
Who can contribute?
Almost any employed person can open a traditional IRA. Whether the contributions are tax-deductible and the amount that you may deduct is determined by the following factors:
- Your filing status
- Whether you are covered by an employer-sponsored retirement plan
- Your modified adjusted gross income (MAGI)
There are several benefits of opening a traditional IRA, including the following:
- Ability to convert to a Roth IRA
- Tax deductions for contributions on your state and federal income tax returns
- Lowers your adjusted gross income
For a Roth IRA, there is not an age limit on who is allowed to open a Roth IRA or to contribute to one. As long as you continue to work, you are able to contribute to your Roth IRA. People who have high incomes may be limited in the amounts that they can contribute or prevented from making contributions to Roth IRAs.
The benefits of Roth IRAs include the following:
- Contributions are after-tax, so withdrawals after retirement will be tax-free;
- Backdoor Roth IRAs allow high earners to make contributions;
- Roth IRAs can help with tax diversification; and
- Roth IRAs are flexible.
If you are age 70 1/2 or older, you cannot contribute to a traditional IRA in 2019. If you have a Roth IRA and are still working, there is no age limit for making contributions.
For SEP-IRAs, both employers and individuals can contribute. The employers are not required to make contributions each year. However, they must contribute an equal percentage to all of their employee’s SEP-IRA accounts during any year that they contribute.
Eligible employees for SEP-IRAs include all workers who are 21 or older and who earn $600 or more during the year. They must have worked for the employer for three out of the last five years before the contribution is made.
For SIMPLE IRAs, employers are required to make contributions by either matching their employees’ contributions or by making annual contributions regardless of whether the employees also contribute. Eligible employees include those who have earned a minimum of $5,000 during any two prior years and who are expected to earn at least $5,000 during 2019.
If you have a spouse who does not work, you can open a spousal IRA for him or her. As a working spouse, you are allowed to make contributions on behalf of your non-working spouse.
2019 income limits for a Roth IRA
Your ability to contribute to a Roth IRA will depend on your filing status and your modified adjusted gross income or MAGI. Your MAGI is your adjusted gross income after certain deductions that you claim are added back into the AGI. Your AGI is your gross income minus your allowable deductions.
In 2019, the Roth IRA income limits for single filers and heads of household fall between $122,000 and $137,000. If you make between these amounts, you will be able to contribute a reduced amount. If you make more than $137,000, you will not be able to make direct contributions to a Roth IRA.
Married couples who file jointly and who earn from $193,000 to $203,000 will be able to contribute a reduced amount to a Roth IRA. If they make more than $203,000, they will not be able to make contributions.
Married couples who file separately have the same limits as single filers as long as the spouses did not live together during the past year. Otherwise, they will have a phase-out range from $0 to $10,000. If you make more than $10,000, you will not be allowed to contribute.
For IRA contributions that you make to a traditional IRA when you are covered by an employer-sponsor retirement plan, whether they are tax-deductible will depend on your MAGI. If you are younger than age 50, your traditional IRA contributions may be deductible up to $6,000.
You will pay the taxes on your traditional IRA contributions when you start taking distributions. Your withdrawals from your traditional IRA are taxed as income. The income tax rate at the time of your withdrawal will be the rate at which the money will be taxed.
Contributions to a Roth IRA are made after you pay taxes. You will not be allowed to deduct your contributions, but your investments will grow tax-free. This means that you will not pay taxes on the withdrawals that you make from your Roth IRA after you retire. There are potentially other tax implications, so be sure to consult your personal tax advisors because M1 Finance does not provide tax advice.
Table for deductible contributions to traditional IRAs in 2019
To help you to understand the max IRA contribution in 2019 for which you can claim a deduction in 2019, you can refer to the following table:
Traditional IRA income limits for claiming deductions in 2019
|Filing status||Full deduction allowed||Partial deduction allowed||No deduction allowed|
|Married filing jointly and have an employer-sponsored plan||$103,000 MAGI limit for full deduction||From $103,000 to $123,000 for a partial deduction||No deduction for MAGI of $123,000 or more|
|Married filing jointly when your spouse has an employer-sponsored plan||MAGI of $193,000 for full deduction||From $193,000 up to $203,000 for a partial deduction||No deduction if you make more than $203,000|
|Single and have an employer-sponsored plan||Up to $64,000 to take a full deduction||From $64,001 to $73,999 for a partial deduction||No deduction for $74,000 or above|
|Married filing separately when either spouse has an employer-sponsored plan||Full deduction unavailable||Partial deduction if you earn less than $10,000||No deduction if you earn more than $10,000|
Benefits of contributing to an IRA
If you contribute to a traditional IRA, you are able to convert it to a Roth IRA even if your income exceeds the Roth IRA income limits. The converted amounts also do not count towards the annual maximum IRA contribution limit.
Traditional IRA contributions can be deducted on both your state and federal income tax returns. Your contributions help to reduce your adjusted gross income so that you will pay lower taxes.
For Roth IRAs, the distributions will not be taxed when you take them. You are allowed to withdraw your contributions without being taxed at any time. When you reach age 70 1/2, you will also not have to take required minimum distributions.
You will have until the tax filing deadline of April 15, 2020, to make 2019 contributions to your IRA. You can also have both a traditional IRA and a Roth IRA to diversify your taxes. Having both types can help you to split the tax benefits of these two accounts. You can divide your annual contributions between them so that you can enjoy a partial deduction now and a source of tax-free income when you retire.
If you believe your income will be higher after you retire than it is now, a Roth IRA may make sense for you. If your income exceeds the Roth IRA income limits, you can complete a Roth IRA conversion to open a Roth account. To do this, contribute $6,000 to a traditional IRA and roll the money over to your Roth IRA.
A SIMPLE IRA can allow self-employed people to save for retirement by combining the employee and employer contributions. This type of plan also allows small businesses to offer retirement accounts to their employees.
Which IRA should I choose?
The IRA that you choose will depend on a number of factors such as your age, whether you have an employer-sponsored plan, the brokerage, and whether you plan to direct your account and your investment goals. The best IRA is tax-efficient. If you believe your income will be higher after you retire than it is now, a Roth IRA might be a good choice. If you think that your income will be lower in retirement, a traditional IRA may be a better choice.
Tips for retirement savings
Here are some tips for building your savings for retirement:
- Contribute the maximum each year to your retirement accounts
- Make the catch-up contributions once you reach age 50 each year
- Avoid withdrawing contributions from your Roth account
- Take advantage of FSAs or flexible spending accounts
- Use an HSA for your health care expenditures
A flexible spending account or FSA and a health savings account or HSA both allow you to make contributions on a pre-tax basis. You can then use the money to make qualified purchases. These accounts can further reduce your taxable income and help you to save money on your taxes.
Why M1 Finance is a good choice
M1 Finance allows you to manage your IRA while paying no commissions or management fees. You can roll all of your 401(k) accounts and IRAs for free to an M1 IRA to stop paying IRA fees.
M1 Finance charges no trading fees or commissions, allowing you to enjoy free investing that is simple and secure. You can maximize your IRA by moving it to M1 Finance.
Open your account
People who open IRAs at M1 Finance can choose to either pick their own securities or to choose from a selection of expert portfolios that match their financial goals and abilities to tolerate risk. M1 offers a mobile app and a desktop investment platform to allow all people to access their accounts from any location with WIFI.
M1 does not charge fees to manage your account or commissions on the trades that you make. M1 uses automatic dividend reinvestments and portfolio rebalancing to help you continue working towards your goals. Call M1 Finance today at 888.714.6674. You can get started today by completing the application online.