The IRA contribution limits for 2020 are $6,000 per person with an additional $1,000 catch-up contribution for people who are 50 or older.
What is an IRA?
IRA or Traditional IRA is a tax-deferred retirement savings account that allows you to make tax-deductible contributions to save towards retirement. Your savings grow tax-free. You do not owe taxes on dividends and capital gains. Once you reach retirement age, you can start taking money out of the account. All distributions from the IRA are taxable as ordinary income in the year of withdrawal.
IRA income limits for 2020
The tax-deductible IRA contribution limits for 2020 are based on your annual income. If you are single and earn $124,000 or less, you can contribute up to the full amount of $6,000 per year. If your aggregated gross income is between $124,000 and $139,000 you can still make contributions but with a lower value.
Married couples filing jointly can contribute up to $6,000 each if your combined income is less than $196,000. If your aggregated gross income is between $196,000 and $206,000 you can still make reduced contributions.
If you are married and not earning income, you can still make contributions. As long as your spouse earns income and you file a joint return, you may be able to contribute to an IRA even if you did not have taxable compensation. Keep in mind that, your combined contributions can’t be more than the taxable compensation reported on your joint return.
IRA vs 401k
IRA is an individual retirement account. 401k plan is a workplace retirement plan, which is established by your employer. You can contribute to a 401k plan if it’s offered by your company. In comparison, starting in 2020, anyone who is earning income can open and contribute to a traditional IRA regardless of your age.
IRA vs Roth IRA
Traditional and Roth IRA have the same annual contributions limits. The Traditional IRA contributions can be tax-deductible or after-tax depending on your income. In comparison. Roth IRA allows you to make after-tax contributions towards retirement. Another difference, your Traditional IRA retirement savings grow tax-deferred, while Roth IRA earnings are tax-free.