How Knowing Contribution Caps Can Help Benefit Your Roth IRA

For those who can afford to put away money in their retirement and savings account, the biggest question is how much to put in. To do so, you need to understand your limits, like the Roth IRA contribution limits and other tax limitations. Unfortunately, most people don't figure these out until it's tax crunch time and their scrambling to sock away some retirement savings.

It's absolutely critical that you understand and are aware of your Roth IRA contribution limits, along with other constraints such as those placed on pensions and 401(k)s. By staying informed, you can plan financially and properly assess your tax savings both now and when you finally access your IRA funds. But, what are those limitations, and how do they work? To learn the answers to these questions and more, keep reading.

Limits on 401(k) Contributions

Though not directly related to a Roth IRA, your 401(k) is interconnected. Two years ago, the U.S. government made a temporary law that allowed higher 401(k) contributions a permanent statute. Now, you can contribute up to $15,500 per year, and people over the age of 50 can play catch up by adding an additional $5000 annually.

Limits on Roth IRA Contributions

Roth IRA contributions sit at a low limit of $5000 for those under the age of 50. That equals out to almost $417 each month. But, if you're 50 and older, you can defer $6000 to your IRA. Those limits are set to increase annually in $500 increments, based on current inflation rates.

If you're currently part of a work-based plan for your IRA and want to convert those to a Roth IRA, there are other constraints in place that could wreak havoc on your plans.

For example, if your MAGI (Modified Adjusted Gross Income) is between $150,000 and $160,000 for a married couple (between $95,000 and $110,000 for a single individual or household head), your ability to deduct those contributions will be phased out.

SIMPLE IRA plans

Employee who are eligible for SIMPLE IRA plans (those funded by salary deferrals and employer contributions) can opt to contribute up to 100% of their compensation, up to a maximum limit of $11,000 each year. Employees and participants who are over the age of 50 can make extra catch-up deferral contributions to an annual limit of $2500.

Roth IRA Catch-Up Plans and Limits

If you're 50 or over and want to make catch-up contributions to your retirement savings (Roth IRA, traditional IRA, 401(k)), you are limited to $5000 in additional payments per year. Of course, you can contribute more to a 401(k), but these are tax-deductible limitations.

Remember, before you invest and start saving for your retirement, make sure you understand your limitations, including your Roth IRA contribution limits, so you can best maximize your tax benefits.

The benefit of doing that little bit of homework can be the difference between saving thousands of dollars in tax-deferred funds or simply turning them over to the IRS.