Key facts
- The regular IRA contribution limit across all IRA accounts, including Traditional and Roth, is $6,000 annually for those under 50 and $7,000 annually for those 50 and older.
- The key differences between a Roth and Traditional IRA are eligibility requirements and tax implications.
The importance of saving for retirement is well-established, and a variety of programs have been created to make setting money aside as painless as possible. IRAs, or Individual Retirement Accounts, are retirement savings plan that offer tax benefits to eligible individuals. Depending on whether you choose a Roth IRA or a Traditional IRA, you may receive a tax benefit on either your contributions or withdrawals.
Understanding the Traditional IRA
The beauty of the Traditional IRA is its simplicity. If your income falls within certain limits, you will not pay taxes on funds you contribute to your retirement account until you make a withdrawal.
Understanding the Roth IRA
Unlike other savings plans, you pay taxes on your contributions to a Roth IRA in the same year that you earn the income but you don’t pay taxes on earnings when you withdraw funds.
2020 IRA Contribution Limits
The IRS reviews guidelines for IRA contribution limits annually. You may have both types of IRAs, but your regular annual contribution for all IRA accounts is capped at $6,000 total for investors under 50 and $7,000 for those 50 and older. Since Traditional and Roth IRAs do have different eligibility requirements, you may decide to open and contribute to different types of IRA accounts over your lifetime. For example, you could contribute to a Roth IRA until you exceed the income cap for eligibility and then start contributing to a Traditional IRA. Contribution limits remained the same but income limits did increase slightly from 2019 to 2020 as per the table below.
| Account type | Limit | 2019 | 2020 | 2020 versus 2019 |
| Traditional IRA | Contribution limit if under 50 | $6,000 | $6,000 | N/A |
| Contribution limit if 50 orover | $7,000 | $7,000 | N/A | |
| Deduction limit | Varies based on tax filing status and whether you or your spouse contribute to a retirement plan at work. | Varies based on tax filing status and whether you or your spouse contribute to a retirement plan at work. | N/A | |
| Roth IRA | Contribution limit if under 50 | $6,000 | $6,000 | N/A |
| Contribution limit if 50 orover | $7,000 | $7,000 | N/A | |
| Income limit (single filers) | Up to limit if < $122,000; Reduced amount if ≥ $122,00 and < $137,000; Zero if ≥ $137,000 | Up to limit if < $124,000; Reduced amount if ≥ $124,00 and < $139,000; Zero if ≥ $139,000 | Increased by $2,000 | |
| Income limit (married filers) | Up to limit if < $193,000; Reduced amount if ≥ $193,000 and < $204,000; Zero if ≥ $204,000 | Up to limit if < $196,000; Reduced amount if ≥ $196,000 and < $206,000; Zero if ≥ $206,000 | Increased by $3,000 |
IRAs are designed to make it as easy as possible for you to save. You have more than 15 months to make deposits for any specific tax year. The time frame extends from January 1 of the current year through the tax filing deadline of the following year, which is usually on or around April 15th. For example, 2019 contributions can be made through the deadline to file 2019 taxes on April 15th, 2020.
Disclosure
Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This article is not intended as investment advice, and Wealthfront does not represent in any manner that the circ*mstances described herein will result in any particular outcome. Financial advisory services are only provided to investors who become Wealthfront clients.
This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circ*mstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.
