The Internal Revenue Service (IRS) limits the annual contributions individuals may make to their retirement plans, including Roth IRAs, traditional IRAs, and 401(k)s.
- For 2020, you can contribute up to $6,000 to a Roth or traditional IRA. If you're 50 or older, the limit is $7,000.
- The most you can contribute to a 401(k) is $19,500, or $25,500 if you're 50 or older.
- If you have a 401(k) match, the combined limit is $56,000, or $62,000 if you're 50 or older, or 100% of your salary if it's less than the dollar limits.
Types of Contributions
Each retirement plan allows for two different types of contributions, based on age. The first, known as a “regular contribution”, applies to individuals younger than 50. The second, known as a “catch-up contribution” is an extra amount available to those 50 or older. The latter is so named because such investors are closer to retirement age and have less time for their assets to grow. The IRS consequently permits larger contributions, in hopes that the investments will “catch up.” Note: Individuals may make catch-up contributions when they're 49, if they'll turn 50 by the end of the year.
IRA Contribution Limits
For 2020, the maximum allowable contributions to Roth IRAs are $6,000 for those younger than 50 and $7,000 for those older. Individuals must have earned income from wages and other sources, in order to contribute to an IRA, and those earnings must match or exceed the amount of the contribution. For example, if you earned $4,000, that's the most you may contribute. Note: if a worker's income exceeds a certain threshold, he or she may not contribute to a Roth IRA at all (see below).
Traditional IRAs observe the same contribution limits as Roth IRAs. But unlike Roth IRAs, individuals may always contribute to a traditional IRAs--regardless of their income levels.
Which Contributions Are Not Counted in the Limit?
While there are annual contribution limits to Roth IRAs, there are no such yearly caps to the following:
- Investments rolled over from one Roth IRA account to another.
- Funds converted from traditional IRAs to Roth IRAs.
- Funds rolled over from 401(k)s and other qualified retirement plan, into IRAs.
Roth IRA Income Limits
Unlike traditional IRAs and 401(k)s, Roth IRAs impose income limits that determine how much one may contribute. And if your income exceeds a certain threshold, you may not contribute to a Roth IRA at all. The following contribution limits must be observed:
If you make too much money to contribute directly to a Roth IRA, you can use the "backdoor" Roth IRA strategy.
- Individuals may contribute the full amount if they're married filing jointly, and their modified adjusted gross income (MAGI) is less than $196,000.
- Individuals may contribute the full amount if they're single, and their modified adjusted gross income (MAGI) is less than $124,000.
- Married joint filers with annual MAGIs ranging from $196,000 to $206,000 may contribute a reduced amount.
- Single filers with MAGIs ranging between $124,000 to $139,000 may contribute a reduced amount.
- Married filers whose MAGIs exceed $206,000 may not contribute to Roth IRAs at all.
- Single filers whose MAGIs exceed $139,000 may not contribute to Roth IRAs at all.
The IRS has a worksheet to walk you through whether or not you can contribute.
Here’s a summary of the Roth IRA income limits for 2020:
|Roth IRA Income Limits|
|If your filing status is…||And your modified AGI is…||You can contribute…|
|Married filing jointly or qualifying widow(er)||Less than $193,000||Up to the limit|
|More than $193,000 but less than $203,000||A reduced amount|
|$203,000 or more||Zero|
|Single, head of household, or married filing separately and you didn't live with your spouse at any time during the year||Less than $122,000||Up to the limit|
|More than $122,000 but less than $137,000||A reduced amount|
|More than $137,000||Zero|
|Married filing separately and you lived with your spouse at any time during the year||Less than $10,000||A reduced amount|
|$10,000 or more||Zero|
Traditional IRA Income Limits
Unlike Roth IRAs, traditional IRAs are funded with pre-tax dollars, so you can usually write off the contribution during the year you make it. But this is governed by several factors.
If you’re single and have no workplace plan, or if you’re married and neither you or your spouse has one, you may fully deduct your IRA contribution--regardless of your income. On the other hand, if you don’t have an employer-sponsored plan, but your spouse has one, you may deduct the full amount if you’re married filing jointly, and your MAGI is $196,000 or less.
The numbers change if you have a workplace plan. For 2020, married couples filing jointly can take the full deduction if they make less than $104,000. If you collectively earn between $104,000 and $124,000, you can take a partial deduction. And if you earn more than $124,000, you may not deduct anything.
In 2020, single filers can take a full deduction if they earn $65,000 or less, they can take a partial deduction if they earn more than $65,000 but less than $75,000, and they may deduct nothing if their income exceeds $75,000.
Here's a rundown of traditional IRA income limits for 2020:
|Traditional IRA Income Limits|
|If your filing status is…||And your modified AGI is…||Then you can take…|
|Single, head of household, qualifying widow(er), married filing jointly or separately and neither spouse is covered by a plan at work||Any amount||A full deduction up to the amount of your contribution limit|
|Married filing jointly or qualifying widow(er) and you're covered by a plan at work||$103,000 or less||A full deduction up to the amount of your contribution limit|
|More than $103,000 but less than $123,000||A partial deduction|
|$123,000 or more||No deduction|
|Married filing jointly and your spouse is covered by a plan at work||$193,000 or less||A full deduction up to the amount of your contribution limit|
|More than $193,000 but less than $203,000||A partial deduction|
|$203,000 or more||No deduction|
|Single or head of household and you're covered by a plan at work||$64,000 or less||A full deduction up to the amount of your contribution limit|
|More than $64,000 but less than $74,000||A partial deduction|
|$74,000 or more||No deduction|
|Married filing separately and either spouse is covered by a plan at work||Less than $10,000||A partial deduction|
|$10,000 or more||No deduction|
More Details on IRA Contributions
With Roth and traditional IRA contributions, limits are imposed per taxpayer, not per account. That means an individual may not contribute $6,000 to a Roth IRA and an additional $6,000 to a traditional IRA in 2020. Instead, one may contribute a total of $6,000, split across the different IRAs, say $4,000 to a Roth IRA, and the remaining $2,000 to a traditional IRA.
Spousal IRAs are regular IRAs that married couples who file jointly may participate in.
Married couples can also contribute the same amounts to a spousal IRA for a non-working spouse, as long as one spouse earns enough income to cover both contributions.
401(k) Contribution Limits
As with traditional IRAs, the eligibility to contribute to 401(k)s is not governed by income limits. Furthermore, investors may annually stash significantly more money in their 401(k)s. Case in point, for 2020, the 401(k) contribution limit is $19,500 for those under 50, and $26,000 for those older.
While 401(k) contributions reduce your taxes, you don't actually claim a deduction when you file, because those contributions come directly out of your paycheck, and are therefore made with pre-tax dollars. This lowers your taxable income for the year, saving you cash at tax time.
401(k) Match Limits
The biggest benefit of a 401(k) plan is the employer match, which is typically a percentage of your contribution, up to a certain amount of your salary. For example, your employer may match 50% of your contributions, up to 5% of your salary. So, if you earn $100,000 and contribute $10,000 to your 401(k), your employer would kick in an extra $5,000.
If your employer offers a match, be sure to contribute enough to take advantage of the full amount.
Although any match your employer provides doesn't count toward your annual contribution limit, the IRS does limit the total dollars annually invested into your 401(k). For 2020, the combined 401(k) contribution limits between yourself and the employer-matched funds are as follows:
- $56,000 if you're under 50
- $62,000 if you're 50 or older
- 100% of your salary if it's less than the dollar limits
Ineligible (Excess) IRA Contributions
Those who invest more dollars into an IRA than they're entitled to will be penalized with a 6% excise tax on any excess contribution. This fine will be levied each year until the mistake is corrected. Most people who make ineligible IRA contributions do so inadvertently, often under the following scenarios:
- They earn more money and fall outside the income eligibility range.
- They forget that they contributed earlier that year.
- They contributed money that doesn’t qualify as earned income.
- They contributed more than their earned income for the year.
How To Fix Excess IRA Contributions
If you realize you’ve contributed too much money to a single IRA account, or a combination of accounts, there are several ways to reverse the excess contributions. But it's important to act fast, because failure to meet deadlines can trigger stiff penalties.
Those who contribute too much to an IRA will annually face a 6% penalty until they correct the mistake.
If you discover your mistake after filing income taxes for the year, you can remove the excess contribution within six months and file an amended return by October 15. Alternatively, you can reduce the following year’s contribution by the excess amount. For example, if you errantly contributed $8,000 one year, you can reduce your contribution by $2,000 (the excess amount) the following year. But remember that carrying forward the excess this way subjects you to that 6% penalty until the excess is absorbed.
Excess 401(k) Contributions
Even though your employer deducts your contributions to a 401(k), it's still possible to over-invest, if the following scenarios occur:
- You switch employers/retirement plans in the same year and contribute too much to each plan.
- You hold two jobs and two plans and fail to realize that the limit is per taxpayer, not per account.
- You receive a raise or a bonus, and neglect to change your contribution percentage accordingly.
How to Fix Excess Deferrals
If you over-contribute to your 401(k), immediately let your plan administrator know you made an excess deferral--hopefully before March 1 of the year following the one in which you over contributed. The excess amount and any related earnings should be returned to you by April 15. If the excess amount isn't returned to you by that date, you may end up paying taxes on the amount twice: once in the year you contributed too much, and once when the excess amount is returned to you.
The Bottom Line
There are annual limits to contributions investors may make in their 401(k) plans and IRAs. If you cannot invest the full amount possible, it is strategically shrewd to max out your investments to your 401(k), to invite the full employer match. Any remaining funds should be channeled to your IRA.