Financial Planning

Traditional IRA Contribution Limits for 2021

The contribution limit for traditional IRAs remains the same for this year as 2020.

Unfortunately for retirement savers, the maximum amount that can be contributed to a traditional IRA in 2021 remains the same as it was for the last two years. Let's hope the limit is increased for 2022.

IRA Contribution Limits for 2021

The maximum amount you can contribute to a traditional IRA for 2021 is $6,000 if you're younger than age 50. Workers age 50 and older can add an extra $1,000 per year as a "catch-up" contribution, bringing the maximum IRA contribution to $7,000. You must have earnings from work to contribute to an IRA, and you can't put more into the account than you earned.

Your 2021 IRA contributions may also be tax-deductible. If you—and your spouse, if married—don't have a retirement plan at work such as a 401(k), you can deduct the full contribution to your traditional IRA on your tax return no matter how much you earn. You have until the federal tax filing deadline to make your IRA contribution for the previous year. For most taxpayers, the deadline for filing 2021 tax returns is April 18, 2022 (April 19 for residents of Maine and Massachusetts).

Even if you have a retirement plan on the job, you may still be able to deduct some or all of your contribution depending on your income. For 2021 IRA contributions, the amount of income you can have and still get a full or partial deduction rises from 2020. Singles with modified adjusted gross income of $66,000 or less and joint filers with income of up to $105,000 can deduct their full contribution for the 2021 tax year. Deductions thereafter decrease and phase out completely once income reaches $76,000 for singles and $125,000 for joint filers.

Be aware that you generally must have earned income to contribute to an IRA. But if you're married and one of you doesn't work, the employed spouse can make a contribution into a so-called spousal IRA for the other.

You can open a traditional IRA through a bank, brokerage, mutual fund or insurance company and invest your IRA money in stocks, bonds, mutual funds, exchange-traded funds and other approved investments.

Why Save for Retirement in an IRA?

Traditional IRAs are best for people "who need an immediate tax deduction or want to defer income in the hopes that their bracket will be lower in the future," according to Mari Adam, a certified financial planner in Boca Raton, Fla. The latter category includes people expecting to retire shortly and those who believe their income will go down in future years, she says. Eventually, you will have to pay taxes on your traditional IRA. Your withdrawals will be subject to ordinary income tax. On top of that, if you take the money out before turning age 59 1/2, you can be hit with a 10% penalty. You will also be obligated to take required minimum distributions (RMDs) after you turn age 72, so you won't be able to avoid the IRS forever.

Roth IRAs vs. Traditional IRAs

The tax rules differ for contributions to a Roth IRA, which aren't tax-deductible. Money instead goes into a Roth IRA after taxes have been paid on it, and you can withdraw contributions at any time free of taxes or penalties. The earnings can also be withdrawn tax- and penalty-free once you have owned the Roth for five years and you're at least age 59 1/2. Also, Roth IRAs don't have required minimum distributions. The amount that can be contributed to a Roth IRA is subject to income limits.

If you can afford to contribute the full $6,000 in 2021 without the help of the tax deduction (which reduces the out-of-pocket cost of a $6,000 contribution to just $4,680 for someone in the 22% bracket) you may be better off saving for retirement in a Roth IRA.

One final note: If you invest in both a traditional IRA and a Roth IRA, the total amount of money you can contribute to both accounts can't exceed the annual limit of $6,000 ($7,000 if 50 or older). If you do exceed it, the IRS might hit you with a 6% excessive-contribution penalty.

Most Popular

The 11 Most Expensive Cities in the U.S.
real estate

The 11 Most Expensive Cities in the U.S.

From metro areas on both coasts to the middle of the Pacific Ocean, these are the priciest cities in the U.S. to call home.
August 9, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
You'll Save More on Green Home Improvements Under the Inflation Reduction Act
Tax Breaks

You'll Save More on Green Home Improvements Under the Inflation Reduction Act

Tax credits for energy-efficient home improvements will be extended and expanded by the Inflation Reduction Act.
August 12, 2022

Recommended

How to Steer Your Retirement Portfolio Through the Storm
retirement planning

How to Steer Your Retirement Portfolio Through the Storm

Right now, it feels like there’s an economic challenge around every corner. But the good news is you can still protect your nest egg.
August 12, 2022
Annuities Rising in Popularity
annuities

Annuities Rising in Popularity

As interest rates increase, so does the appeal of annuities. How much do you know about these insurance products?
August 9, 2022
Reading, Writing, and Personal Finance
Raising Money-Smart Kids

Reading, Writing, and Personal Finance

A growing number of high schools are adding personal finance to their curriculum.
August 4, 2022
18 States With Scary Death Taxes
inheritance

18 States With Scary Death Taxes

Federal estate taxes are no longer a problem for all but the extremely wealthy, but several states have their own estate taxes and inheritance taxes t…
July 29, 2022