Each year, the IRS reveals new requirements and limits for those investing in IRAs (individual retirement accounts). These limits relate to maximum contributions investors can make. You will need all the facts about these new limits to avoid mistakes that could cost you big on one side of retirement or the other. This information is what you need to know about 2020 contribution limits and how they are different from those of 2019.
IRA Overview
IRAs are valuable tools in any well-rounded retirement investment strategy. These accounts allow you the opportunity to increase the amount of money you invest each year in addition to your employer-sponsored 401(k) plan.
Because the rules change routinely for most IRA contributions, it is important to watch the Internal Revenue Service (IRS) for important information related to:
- Age
- Maximum income
- Maximum contributions
Understanding and abiding by these limits may help you avoid costly mistakes that could result in hefty fines.
2020 IRA Contribution and Income Limits
From the outset, the maximum contribution for 2020 traditional or Roth IRAs cannot exceed $6,000, unless you are aged 50 or over. Then, it is $7,000 unless your total taxable income for the year is less than the standard maximum contribution, in which case, you can only contribute as much as your taxable income for the year.
There are exceptions to the maximum contribution regulations when it comes to rollover contributions. Employer-sponsored SEP IRAs have different restrictions as well, allowing maximum contributions of 25 percent of the employee’s annual income or $57,000 – whichever is the lower number of the two.
Roth IRA Limits for 2020 Highlights
- Jointly filing married couples will experience reduced contribution limits with incomes from $196,000 to $205,999. You can contribute up to the limit if your income is under $196,00 and you are a jointly filing married couple.
- Separately filing married couples experience reduced contributions with income less than $10,000, representing no change from 2019 to 2020.
- Single individuals experience reduced contribution limits with incomes from $124,000 to less than $138,999. Single individuals with incomes under $124,000 can contribute up to the limit.
- Single heads of household experience reduced contribution limits with incomes from $124,000 to less than $138,999. Single heads of households with incomes less than $124,00 can contribute up to the limit.
However, those filing separately who did not live with their spouses at any time during the year shall use the “single” filing status to determine their deductions.
Individuals can review the Roth IRA Required Minimum Distribution guidance issued by the IRS for additional information.
Traditional IRA Limits for 2020 Highlights
- Single individuals with workplace retirement plans phase-out limits range between $65,000 and $74,999.
- Married couples filing jointly with workplace plans experience phase-out between $104,000 and $123,999.
- Married couples filing jointly without workplace retirement plans may deduct the full amount of their contributions up to their plan limits.
- Single individuals without workplace plans experience no phase-out and may deduct their entire contributions.
- Married couples filing separately with either spouse having a covered work plan, experience phase-out between $0 and 9,999.
Individuals can review the Traditional IRA Contribution and Deduction Limits guidance issued by the IRS for additional information.
Types of IRAs
You might be surprised to learn that you can choose from seven different types of IRAs. Depending on your current circumstances and your retirement goals, some types may be better for your needs than others. The seven types are:
- Traditional IRAs
- Roth IRAs
- SEP IRAs (simplified employee pensions, which are completely employer-funded)
- Nondeductible IRAs
- Spousal IRAs
- Simple IRAs
- Self-Directed IRAs
Traditional and Roth IRAs are the most common among these, though they are far from the only options available.
Knowing the facts about contribution and income limits is half the battle. It is also wise to explore your option to see which IRA offers you the best long-term outcome. While there are no guarantees when investing, one thing is true, avoiding penalties and unnecessary fees is more desirable than paying them. Keep this information close to stay on the right side of old Uncle Sam.