Table of Contents
An Individual Retirement Account (IRA) serves as a strategic means for taxpayers to plan their retirement, allowing them to defer income through contributions made with either pre-tax or after-tax dollars. In 2023, the collective contributions across all Traditional and Roth IRAs cannot be more than $6,500 (or $7,500 for individuals aged 50 and above, termed catch-up contributions) or the individual’s taxable compensation for the year, if lower than this dollar limit. For 2024 and 2025, the collective contributions across all Traditional and Roth IRAs cannot exceed the following limits:
- 2024: $7,000 ($8,000 for individuals aged 50 and above, termed as catch-up contributions)
- 2025: $7,000 ($8,000 for individuals aged 50 and above, catch-up contributions)
Alternatively, the contribution limit is restricted to the individual’s taxable compensation for the year if it is lower than these dollar amounts.
Types of IRAs
Traditional IRA:
- Contributions may be deductible on income tax returns or treated as non-deductible.
- Earnings grow tax-deferred and are only subject to income tax upon distribution.
- Required minimum distributions (RMDs) apply starting at age 73 (as per current law).
Roth IRA:
- Contributions are not deductible, but qualified distributions are tax-free.
- Distributions are not required while the account holder is alive.
- Contribution eligibility is subject to income phaseouts.
SEP (Simplified Employee Pension Plan) IRA
- Tailored for small business owners and self-employed individuals.
- Employers contribute on behalf of employees, up to 25% of employee compensation or $69,000 for 2024 whichever is less.
- Employees cannot contribute directly.
- Contributions are immediately 100% vested.
SIMPLE (Savings Incentive Match Plan for Employees) IRA
- Established by employers, allowing employees to contribute pre-tax wages.
- Employees can contribute up to $15,500 in 2023 for age 50 above ). For 2024, the limit increases to $16,000.
- Employers must match contributions up to 3% of employee compensation or make a 2% non-elective contribution.
401(k) Plans
401(k) plans are employer-sponsored retirement savings plans offering higher contribution limits than IRAs:
- 2024 Contribution Limits: $23,000 ($31,000 with catch-up contributions).
- Contributions are pre-tax, and earnings grow tax-deferred.
- Employers often match a percentage of employee contributions.
Solo 401(k)
- Designed for self-employed individuals or business owners with no employees.
- Allows for both employee and employer contributions, with a total limit, for 2025, the limit increases to $70,00
- Contributions are tax-deductible, and earnings grow tax-deferred.
Contribution Details: All You Need to Know
Traditional IRA Deduction Limits
Your ability to deduct contributions to a Traditional IRA depends on your income and whether you or your spouse is covered by a retirement plan at work. Below are the 2024 and 2025 limits:
|
Filing Status |
2024 MAGI Range |
2025 MAGI Range |
Deduction Limit |
|
Single or head of household (covered by work plan) |
$77,000 or less |
$79,000 or less |
Full deduction |
|
$77,001 - $87,000 |
$79,001 - $89,000 |
Partial deduction |
|
|
$87,001 or more |
$89,001 or more |
No deduction |
|
|
Married filing jointly (both covered by work plan) |
$123,000 or less |
$126,000 or less |
Full deduction |
|
$123,001 - $143,000 |
$126,001 - $146,000 |
Partial deduction |
|
|
$143,001 or more |
$146,001 or more |
No deduction |
|
|
Married filing jointly (spouse covered by work plan) |
$230,000 or less |
$236,000 or less |
Full deduction |
|
$230,001 - $240,000 |
$236,001 - $246,000 |
Partial deduction |
|
|
$240,001 or more |
$246,001 or more |
No deduction |
|
|
Married filing separately |
Less than $10,000 |
Less than $10,000 |
Partial deduction |
|
$10,000 or more |
$10,000 or more |
No deduction |
Roth IRA Contribution Limits
The allowable Roth IRA contribution depends on your modified adjusted gross income (MAGI) and filing status. Below are the 2024 and 2025 limits:
|
Filing Status |
2024 MAGI Range |
2025 MAGI Range |
Contribution Limit |
|
Married filing jointly |
$230,000 or less |
$236,000 or less |
Full contribution |
|
$230,001 - $240,000 |
$236,001 - $246,000 |
Phased out |
|
|
$240,001 or more |
$246,001 or more |
No contribution |
|
|
Single or head of household |
$146,000 or less |
$150,000 or less |
Full contribution |
|
$146,001 - $161,000 |
$150,001 - $165,000 |
Phased out |
|
|
$161,001 or more |
$165,001 or more |
No contribution |
|
|
Married filing separately |
Less than $10,000 |
Less than $10,000 |
Phased out |
|
$10,000 or more |
$10,000 or more |
No contribution |
Early Withdrawal Penalty Exceptions
Early withdrawals before age 59½ may incur a 10% penalty. Exceptions include withdrawals made:
- Due to death or disability.
- For unreimbursed medical expenses exceeding 7.5% of AGI.
- To pay health insurance premiums while unemployed.
- For qualified higher education expenses.
- For a first-time home purchase (up to $10,000).
- As part of a series of substantially equal periodic payments.
- Due to an IRS levy, qualified reservist distribution, or adoption/birth expenses.
IRA Rollovers
to consolidate their savings, preserve tax advantages, or avoid penalties. These rollovers are especially useful during major life changes, such as career transitions or changes in financial institutions. By ensuring the tax-deferred status of retirement funds, rollovers help individuals avoid unnecessary tax burdens while optimizing their retirement planning strategy.
- Direct Rollovers: This involves transferring funds directly from one retirement account to another through financial institutions. Since funds never pass through the individual’s hands, this method avoids mandatory tax withholding and minimizes the risk of errors.
- 60-Day Rollovers: This method allows account holders to withdraw funds and redeposit them into another qualified account within 60 days. However, failing to meet this strict timeline can result in taxes and penalties.
- One Rollover Per Year Rule: To avoid potential issues with the IRS, individuals are limited to one rollover between IRAs within a 12-month period. Direct rollovers and transfers between different types of accounts (e.g., 401(k) to IRA) do not count toward this limit.
Benefits of Rollovers
Consolidating multiple accounts into a single IRA simplifies account management and may reduce administrative fees. Additionally, maintaining tax advantages ensures that retirement savings continue to grow without unnecessary tax implications. Required Minimum Distributions (RMDs)
Required Minimum Distributions (RMDs)
RMDs are mandatory withdrawals from specific retirement accounts, aimed at ensuring that account holders eventually use their tax-advantaged savings rather than allowing them to accumulate indefinitely. These withdrawals begin at age 73 (as per current law).
Key Points to Understand
- Applies to:
RMDs apply to Traditional IRAs, SEP IRAs, SIMPLE IRAs, and 401(k) plans. Roth IRAs are exempt during the account holder’s lifetime. - Calculation of RMDs:
The required amount is calculated using the IRS Uniform Lifetime Table or other applicable life expectancy tables, depending on the account holder's circumstances. The formula for calculating RMDs is:
RMD=Account Balance at the End of the Prior Year / Life Expectancy factor
For example, if the account holder’s balance was $500,000 and their life expectancy factor is 25.6 (based on the IRS table), the RMD would be:
RMD=500,000/25.6 which is 19,531.25
Penalties for Non-Compliance
If an RMD is missed or under-withdrawn, a 25% excise tax applies to the amount not withdrawn on time. However, this penalty may be reduced to 10% if the shortfall is corrected in a timely manner.
Contribution Deadlines
The deadline to contribute to an IRA for any given tax year is the following year’s tax filing deadline (usually April 15). For example:
- 2024 Contributions Deadline: April 15, 2025
- 2025 Contributions Deadline: April 15, 2026
Historical Contribution Limits
|
Year |
Maximum Contribution (Under 50) |
Maximum Contribution (50+) |
|
2025 |
$7,000 |
$8,000 |
|
2024 |
$7,000 |
$8,000 |
|
2023 |
$6,500 |
$7,500 |
|
2019-2022 |
$6,000 |
$7,000 |
|
2013-2018 |
$5,500 |
$6,500 |
To Sum Up
Taxpayers can refer to IRS Publication 590-A, which provides a worksheet to calculate reduced contribution limits based on modified AGI. This publication offers crucial guidance for navigating Roth IRA contributions within income-based restrictions.
Additionally, when managing retirement contributions, it is essential to collaborate with financial experts. NSKT Global is a consultation firm specializing in helping clients optimize retirement accounts, minimize tax burdens, and navigate the complexities of business taxes. For personalized assistance and insights into financial planning, consider reaching out to NSKT Global.
