IRA Contribution Rules

By Peter A. Elwell, CFA | January 15, 2024

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An individual retirement account (IRA) is a long-term savings plan that you can contribute to and grow your money tax-free or tax-deferred. Individuals contribute funds to the account — typically a set amount each month — and can choose from various investment options to gain returns. The more you contribute, the more funds you may have to enjoy in retirement.

At a certain age, you withdraw the funds either tax-free or pay taxes on distributions, depending on the type of IRA you have. Each type has specific income limits, contribution limits, and distribution requirements. We cover IRA limits, tax benefits, and rules so you can make better-informed decisions when investing in your future.

General IRA Account Rules 

IRAs benefit individuals who may not have access to employer-sponsored retirement accounts like 401(k)s, but investors can hold both simultaneously. However, IRAs are self-managed because they are not offered through employers. There are some exceptions to this IRA rule, such as the Savings Incentive Match Plan for Employees (SIMPLE) IRA and Simplified Employee Pension (SEP) IRA, which some sponsors may offer.

If you’re interested in learning more about IRAs and opening one for your retirement, here are some things to consider about these investments.

Withdrawal Requirements

Withdrawal requirements, also known as required minimum distributions, are the funds you must take out of your IRA annually once you reach a certain age. You must generally begin taking out funds at age 72. In some IRA types, such as a Roth IRA, you are not required to take minimum distributions. If withdrawal requirements and required minimum distributions apply to you, they are calculated based on your account balance on the last day of the previous tax year, divided by your life expectancy.

You must take distributions if you are over the required age, even if you are still working. If you’re under the age of 59 ½ and wish to take funds out of your account early, you may do so. However, the funds may be considered taxable income and subject to penalties and additional tax. Owners of traditional IRAs pay income tax on all withdrawals regardless of their age since a traditional IRA is a tax-deferred account.

Tax Deductions

Contributions to some IRA plans may be tax deductible. If you open a traditional IRA and do not already have a qualified retirement plan through your employer, your contributions may be fully deductible if you meet the income limits. 

Married couples may benefit from a partial deduction if one spouse has a plan through their employer but the other does not. Individuals and couples with plans through their work receive partial or full deductions based on their earned income.

If you open a traditional IRA and do not already have qualified retirement pan through your employer, your contributions may be fully deductible if you meet the income limits.

Roth IRA contributions are not tax-deductible, but the withdrawals are tax-free. The opposite is true for traditional IRAs. Depending on your other retirement accounts, you may still be able to defer income tax on your IRA contributions.

Eligible Contributors

If you already have an employer-sponsored retirement plan at work, you can still contribute to a traditional or Roth IRA. There is no age restriction on individuals who wish to open most IRAs. Anyone under a certain income limit can contribute to an IRA. This includes single individuals and married couples filing jointly.

Married couples can each contribute to their own IRAs. If one spouse is employed and the other isn’t, they can also contribute a certain amount to an IRA for their non-employed spouse. These contribution amounts depend on your income and must abide by contribution limits from the Internal Revenue Service (IRS).

Annual Contribution Limits for IRAs

All IRAs have contribution limits, including traditional and Roth IRAs. For 2023, the IRA max contribution for those under 50 years old is $6,500. If you’re over 50, the limit extends to $7,500. However, your IRA contribution limits can also change based on your income and filing status. While you can contribute to several IRAs in the same year, such as if you have a traditional and Roth IRA, the combined contribution amount cannot exceed the annual limit.

Your contributions also cannot exceed your income for the year. For example, if you only earned $3,000 for the year, you cannot contribute more than $3,000 to an IRA. The only exception to this rule applies to married couples. As noted above, a spouse earning income may open and contribute to an IRA on behalf of their non-employed spouse.

Age Rules for IRAs

While some individuals do not contribute to an IRA once they reach the age for required minimum distributions, there is no age limit for contributing to an IRA. This means that even when you must begin making withdrawals from your account, you can still contribute to it.

Because you only have to withdraw a portion each year from your IRA, you can essentially replenish your retirement savings by contributing while taking your required minimum distributions. Better yet, if you can deduct your contributions, you may be able to offset any tax you may be liable for from taking the distributions.

The IRS generally changes the contribution limit each year, so it’s important to stay informed if you want to put in as much money as possible.

Eligible Compensation for IRAs

Roth IRAs, like 401(k)s, have income limits. These restrictions are put in place to prevent high-income taxpayers from benefitting more than those with less income. Before we discuss the income limits, you should understand what eligible compensation — or earned income — can be put toward an IRA. Eligible income includes:

  • Tips
  • Salary
  • Wages
  • Bonuses
  • Commissions
  • Earning from self-employment 

Certain types of income are not considered eligible earned income and cannot be contributed to a Roth IRA, such as:

  • Alimony
  • Dividends
  • Child support
  • Annuity income
  • Interest income
  • Pension income
  • Unemployment benefits
  • Deferred compensation benefits
  • Social Security retirement benefits 
  • Income from passive investments like rental properties and securities

The income limit for a Roth IRA is based on your tax filing status and modified adjusted gross income (MAGI). For 2023, single filers can contribute the maximum amount to a Roth IRA if they have a MAGI of less than $138,000. For married couples filing separately, income must be less than $218,000. For married couples filing jointly, income must be under $228,000.

If your income exceeds the threshold for one of these categories, the amount you can contribute to your Roth IRA is reduced. In some cases, people who earn a very high amount may not be able to contribute to a Roth IRA at all.

Traditional IRAs do not have income limits, meaning you can open one through a financial institution and contribute to it regardless of what you earn for the year.

Traditional IRAs do not have income limits, meaning you can open one through a financial institution and contribute to it regardless of what you earn for the year. Instead, your income determines the amount you can deduct on your taxes from your contributions. Tax deductions for traditional IRAs also depend on whether you and your spouse are covered by a retirement plan at work.

FAQs About IRA Contributions

Investing in an IRA can be a bit of a complex process if you’re unfamiliar with retirement savings accounts and how they work. We’ve compiled a list of some common questions investors might have about IRAs to help you feel more confident in your decision.

1. What Are Catch-Up Contributions?

Catch-up contributions are additional retirement savings contributions people can make toward IRA or 401(k) accounts. Individuals 50 and older can participate in these contributions to make up for missed investment opportunities. Catch-up contributions are an exception to the annual contribution limits as they are larger than the standard limit.

This benefit allows older individuals to set aside more earnings for retirement. The amount that investors can contribute changes each year. Here are the catch-up contribution limits for 2023:

  • Traditional or Roth IRAs: The limit for 2023 is $1,000.
  • 401(k) plans: The limit for 2023 is $7,500.
  • SIMPLE IRA: The limit for 2023 is $3,500.

2. Can I Contribute to a Traditional and a Roth IRA in the Same Year?

Yes. You may hold and contribute to both types of IRAs in the same year as long as you’re eligible. However, the annual contribution limit applies to all of your IRAs. You can also contribute to an IRA and an employer-sponsored plan in the same year, such as a 401(k), SEP IRA, or SIMPLE IRA. However, your contributions may not be tax-deductible.

3. What Are the Deadlines for Making Contributions?

Individuals generally must make all contributions by their tax return filing deadline, not including extensions. For example, you can contribute to your IRA for 2023 until April 18, 2024. If you have a SEP IRA, you can make contributions until the due date of your return, including extensions. With a six-month extension, for instance, you’d have until October 15 to contribute to your IRA.

4. Will My Employer Match My IRA Contributions?

No. An IRA is a self-directed account, meaning you open and manage it on your own. Employers do not offer IRAs, in general, apart from SEP and SIMPLE IRAs. With a SIMPLE IRA, employers must make a matching or nonelective contribution. Some employers may also make a matching contribution to a 401(k).

5. Can I Open an IRA if I’m Not Working?

No. If you aren’t working and making qualified earned income, you can’t contribute to a traditional or Roth IRA. However, if you have a spouse willing to contribute to an IRA on your behalf, they may do so as long as they meet IRA requirements.

6. Can I Invest in Real Estate With My IRA?

Yes. You can use your IRA to invest in publicly traded real estate assets such as real estate investment trusts (REITs). You can use your IRA to purchase investment properties that provide rental income, such as a multifamily apartment complex. Additionally, you can open a self-directed IRA to access direct real estate investments, private REITs, and real estate-oriented funds.

Investing in a REIT enables you to invest in commercial real estate without becoming a landlord and to access income-producing properties that you may not be able to afford on your own, such as office or hospitality buildings. Another benefit of investing in a REIT is that you won’t have to manage the day-to-day responsibilities but gain the potential to receive passive income and diversification for your investment portfolio. 

If you invest in a REIT using a Roth IRA, you can avoid paying taxes on distributions from the REIT. With a traditional IRA, you won’t owe any taxes until you withdraw funds from the account.

How to Determine Which IRA Is Right for You

Choosing an IRA that fits your financial and retirement goals can be a bit challenging. Here are some factors to consider before making your decision:

How to Determine Which IRA Is Right for You?

1. Tax Advantages

Do you want to gain tax benefits when contributing to your IRA or receiving your distributions? Qualified withdrawals are tax-free in a Roth IRA because you fund the account with post-tax dollars. The opposite is true for a traditional IRA — you fund the account with pre-tax dollars and pay taxes when you make withdrawals. Decide whether you want to pay now or later for your benefits.

2. Withdrawal Ability

Before age 59 ½, investors can take early distributions from Roth IRA contributions on an account that’s at least five years old without paying penalties or taxes. However, there is a 10% federal penalty tax on withdrawals of earnings.

A traditional IRA generally poses a 10% federal penalty tax on early withdrawals of both contributions and earnings. 

A Roth IRA may be ideal if you think you might need to access some of your money before retirement age.

3. Investment Opportunities

Opening an IRA allows access to many investment types that may offer additional benefits for retirement. These investments include passive investing in real estate, stocks, bonds, and mutual funds. However, owning more accounts does not mean you can contribute more, as the annual limit applies across all accounts.

4. Future Tax Bracket

Another consideration for deciding between different IRAs is how much you think your future income will change compared to your current financial circumstances. For example, determine whether the tax rate you will pay on your traditional IRA distributions will be lower or higher than the rate you pay on Roth IRA contributions today.

If you aim to be in a higher tax bracket by the time you retire, a Roth IRA may be better suited to your current situation. If you believe you’re in a higher tax bracket now than you will be during retirement, or if you don’t have access to an employer-sponsored retirement plan, a traditional IRA may fit your needs better.

5. Beneficiary Options

Opening more IRAs means you have access to more investment opportunities that you can pass on to your heirs. Some investors use one IRA to pursue passive investments like REITs and others to manage funds more actively. If you have more than one child, having several IRAs means you can name one child as a beneficiary for each account.

6. Spousal Support

If you have a spouse who makes very little income or none at all, you can open a spousal IRA for them and contribute on their behalf. This can double your annual contribution limit.

Though we’ve mostly covered traditional and Roth IRAs, there are several other types of IRAs that may suit your investing and retirement needs.

Discover More About Investing in IRAs With 1031 Crowdfunding

Opening an IRA can offer many potential tax advantages and other benefits for your retirement. If you’re interested in generating passive income and increasing your net worth, exploring all the options an IRA offers is important. At 1031 Crowdfunding, we evaluate our client’s current and future financial needs to help them reach their goals.

With so many IRA types out there, choosing the right account requires understanding all the potential benefits and risks of your investment. 1031 Crowdfunding offers IRA-qualified real estate investment options through our state-of-the-art online marketplace. Create an investor account with us today, or learn more about investing in IRAs.

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