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Contributing to an IRA every year helps prepare you for comfortable retirement while providing valuable tax benefits. Sometimes tax law can be intimidating, though, and you may be unsure exactly how much you’re allowed to invest. Here’s an explanation of the limits for 2014 and what conditions may affect your maximum allowable contributions.
What is an IRA and which type of IRA should I choose?
An Individual Retirement Account is a special account with a financial institution that lets you to save for retirement with either tax-free growth or tax-deferred benefits. The two types of individual retirement accounts that offer these advantages are Traditional IRAs and Roth IRAs. Before choosing between these investments, it’s important to understand the major differences:
Contributions aren’t taxable until the money is withdrawn, generally during retirement years when taxable income is lower. You can only contribute to a traditional IRA until age 70½. Once you reach this age, you’re required to start taking minimum distributions.
Pay income tax on the funds you contribute up front, and then the IRA grows tax-free. When you withdraw the money, no income tax is due. You can contribute at any age and aren’t required to begin taking distributions at any specific time.
How much can I contribute for 2014?
For either a traditional or Roth IRA, here are the 2014 maximum contribution limits:
- Age 49 and under: The lesser of your taxable compensation for the year or $5,500.
- Age 50 and over: The lesser of your taxable compensation for the year or $6,500.
These limits do not apply to rollover contributions or qualified reservist repayments.
Although they share the same general maximum contribution amounts as their traditional counterparts, Roth IRAs come with some additional contribution limitations based on income:
|Filing Status||Adjusted Gross Income||Maximum Contribution|
|Married filing jointly or qualified widow(er)||Below $181,000||Up to the limit|
|Married filing jointly or qualified widow(er)||$181,000 to $190,999||Reduced amount|
|Married filing jointly or qualified widow(er)||$191,000 or more||Zero|
|Married filing separately (living with spouse)||Less than $10,000||Reduced amount|
|Married filing separately (living with spouse)||$10,000 or more||Zero|
|Single, head of household or married filing separately but not living with spouse||Less than $114,000||Up to the limit|
|Single, head of household or married filing separately but not living with spouse||Greater than $114,000 but less than $129,000||Reduced amount|
|Single, head of household or married filing separately but not living with spouse||$129,000 or more||Zero|
Special considerations: Employer retirement plans
If your or your spouse has a 401(k) plan at work, this may reduce your maximum allowable IRA tax deduction depending on your income:
Single or Head of Household
- Deduct up to the contribution limit if you earn up to $60,000.
- Claim a partial deduction for earnings above $60,000 but less than $70,000.
- No deduction allowed for earnings over $70,000.
Married filing jointly or qualified widow(er)
- Deduct the contribution limit for earnings of $96,000 or less.
- Receive a partial deduction for earnings above $96,000 but less than $116,000.
- No deduction allowed for earnings over $116,000
Married filing separately
- Receive a partial deduction for earnings less than $10,000.
- No deduction allowed for earnings of $10,000 or more
Once you examine IRA tax laws, they really aren’t all that complicated or difficult to digest. Taking the time to understand contribution limits helps ensure your best tax advantages and financial comfort both now and during your retirement.
Retirement illustration via Shutterstock.