Do you have a 401(k) plan through work? You can still contribute to a Roth IRA (individual retirement account) and/or Traditional IRA as long as you meet an IRA Eligibility requirements.
You may not get a tax deduction for your Traditional IRA contributions if you also have a 401(k), but that won’t affect how much you’re allowed to contribute. In 2022, you can contribute up to $6,000 or $7,000 with a catch-up contribution for those 50 and older. In 2023, that amounts to $6,500 and $7,500.
You should contribute enough to your 401(k) account to get the maximum amount appropriate contributions from your employer. But adding an IRA to your retirement mix can then give you more investment options, and the fees may be lower than your 401(k) fees. A Roth IRA will also provide you with a tax-free source of income in retirement. Here are the rules you will need to know.
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- Having a 401(k) account at work does not affect your IRA contribution eligibility.
- Your income determines whether your Traditional IRA contributions are deductible.
- The amount you can contribute to a Roth IRA depends on your income.
- A spouse’s IRA allows you to contribute as your spouse works even if you have no earned income yourself.
- The Internal Revenue Service applies a 6% excise tax if you over-contribute to your IRA.
Eligible IRAs and Contribution Limits
The contribution limit for both Traditional and Roth IRAs is $6,000 per year, plus $1,000 catching up contribution for those 50 and older, for the tax year and 2022. In 2023, the limits are $6,500 for those under 50 and $7,500 for those 50 and older.
You can split your contributions between different types of IRAs, for example by having both a Traditional IRA and a Roth IRA. But your total contribution cannot be higher than the limit for that year. Traditional and Roth IRAs also have some different rules regarding your contributions.
Traditional IRA
Contributions to a traditional IRA are usually tax deductible. But if you are covered by a 401(k) or any other employer-sponsored plan, then modified adjusted gross income (MAGI) will determine the amount of contributions you can deduct, if any.
The following tables break it down:
| Ability to deduct IRA contributions if you also have an Employer Plan for 2022 | ||||
|---|---|---|---|---|
| Tax payment status | Income to deduct full contributions | Partially deductible income | On this income, no deduction | contribution limit |
| Single | Less than $68,000 | $68,000 to $78,000 | Over $78,000 | $6,000 + another $1,000 if you’re over 50 |
| Married, have your own 401(k) fund | Less than $109,000 | $109,000 to $129,000 | Over $129,000 | $6,000 per person + $1,000 extra if you’re over 50 |
| Married, spouse with 401(k) | Less than $204,000 | $204,000 to $214,000 | Over $214,000 | $6,000 per person + $1,000 extra if you’re over 50 |
| Married to a separate 401(k) fund, filing separate returns | $0 | $0 to $10,000 | Over $10,000 | $6,000 + another $1,000 if you’re over 50 |
| Ability to deduct IRA contributions if you also have an Employer Plan for 2023 | ||||
|---|---|---|---|---|
| Tax payment status | Income to deduct full contributions | Partially deductible income | On this income, no deduction | contribution limit |
| Single | Less than $73,000 | $73,000 to $83,000 | Over $83,000 | $6,500 + extra $1,000 if you’re over 50 |
| Married, have your own 401(k) fund | Less than $116,000 | $116,000 to $136,000 | More than $136,000 | $6,500 per person + $1,000 extra if you’re over 50 |
| Married, spouse with 401(k) | Less than $218,000 | $218,000 to $228,000 | More than $228,000 | $6,500 per person + $1,000 extra if you’re over 50 |
| Married to a separate 401(k) fund, filing separate returns | $0 | $0 to $10,000 | Over $10,000 | $6,500 + extra $1,000 if you’re over 50 |
IRS Publication 590-A explains how your deductible contribution is calculated if you or your spouse are covered by a 401(k) plan.
Even if you don’t qualify for deductible contributions, you can still benefit from tax-deferred investment growth in an IRA by making non-deductible contributions. If you do that, you’ll need to file an IRS Model 8606 with your tax return for the year.
Roth IRA
Roth IRAs offer no upfront tax benefits, and it doesn’t matter if you have an employer plan. How much you can contribute, or whether you can contribute, is based on your tax return status and income for the year.
This table shows the current income thresholds:
| Roth IRA Contribution for 2022 | ||||
|---|---|---|---|---|
| Tax payment status | Full Contribution Income | Partial contribution income | Contributions are not allowed | contribution limit |
| Single | Less than $129,000 | $129,000 to $144,000 | Over $144,000 | $6,000 + another $1,000 if you’re over 50 |
| Married, filing jointly | Less than $204,000 | $204,000 to $214,000 | Over $214,000 | $6,000 per person + $1,000 extra if you’re over 50 |
| Get married, declare separately | $0 | $0 to $10,000 | Over $10,000 | $6,000 + another $1,000 if you’re over 50 |
| Roth IRA Contribution for 2023 | ||||
|---|---|---|---|---|
| Tax payment status | Full Contribution Income | Partial contribution income | Contributions are not allowed | contribution limit |
| Single | Less than $138,000 | $138,000 to $153,000 | More than $153,000 | $6,500 + extra $1,000 if you’re over 50 |
| Married, filing jointly | Less than $218,000 | $218,000 to $228,000 | More than $228,000 | $6,500 per person + $1,000 extra if you’re over 50 |
| Get married, declare separately | $0 | $0 to $10,000 | Over $10,000 | $6,500 + extra $1,000 if you’re over 50 |
Spousal IRA
You must have earned income to contribute to an IRA. However, there is an exception for couples with only one spouse working outside the home. It’s a Spousal IRA. It allows the employed spouse to contribute to the non-working spouse’s IRA and doubles the family’s retirement savings. You can open a spousal IRA as a traditional account or a Roth account.
Your combined total contributions in a spousal IRA cannot exceed the taxable compensation reported on the joint tax return.
What happens if you contribute too much?
If you discover that you have contributed more to your IRA than allowed, you will want to withdraw your funds. over-contributing– and nimble. Failure to do so in a timely manner may result in you being subject to 6% excise tax each year on amounts over the limit.
The penalty is waived if you withdraw your funds before paying taxes for the year of contribution. You also need to calculate your excess contributions earned while they are in the IRA and withdraw it from the account.
Investment returns must also be included total income during the year and are taxed accordingly. Moreover, if you are under 59½, you will be penalized 10% for early withdrawal on that amount.
