Updated Roth and Traditional IRA Contribution Limits

The contribution limits for individual retirement accounts (IRAs) for the 2023 tax year is $7,500 if you're age 50 or older. This includes contributions for both Roth IRAs and traditional IRAs. But, there are restrictions that could affect how much you can contribute and what you can deduct on your tax return.

IRA Contribution Limits

As noted above, there are limits to how much you can contribute to your retirement accounts, including IRAs. These limits are set and adjusted for inflation annually and are published by the Internal Revenue Service (IRS).

The maximum contribution limit for Roth and traditional IRAs for 2023 is:

• $6,500 if you're younger than age 50
• $7,500 if you're age 50 or older

You Can Only Contribute Earned Income

You must have earned income to contribute to an IRA. There are two ways to get earned income: work for someone else who pays you, owns, or runs a business or farm. The IRS has a list of what's included in earned income and what's excluded, which is highlighted in the table below.

The IRS considers income from alimony and separation settlements as earned income as long as the decrees are executed on or before Dec. 31, 2018. Income from partnerships is excluded if the services you provided didn't generate any material income. Amounts excluded from your income may include any foreign-earned income.

For 2023, you can contribute as much as $6,500 to an IRA or $7,500 if you're age 50 and older. But you must have enough earned income to cover the contribution.

If your earned income for the year is less than the contribution limit, you can only contribute up to your earned income. For example, if you earned $3,000, you can contribute a maximum of $3,000.

Spousal IRAs

If you don't have earned income but your spouse does, you can open what's called a spousal IRA. These accounts allow a person with earned income to contribute on behalf of their spouse, who doesn't work for pay.

You can structure a spousal IRA as a traditional or Roth IRA. Either way, the spouse with earned income can contribute to the IRAs of both spouses, provided they have enough earned income to cover both contributions.

Roth IRA Income Limits

You can contribute to a traditional IRA regardless of how much money you earn. But you're not eligible to open or contribute to a Roth IRA if you make too much money. Here's a rundown of the 2023 Roth IRA income and contribution limits, based on your filing status and modified adjusted gross income (MAGI):

There are still ways around the Roth IRA contribution limits. If you make a contribution to a nondeductible IRA, you can convert it to a Roth IRA. The same applies to nondeductible contributions made to a 401(k) plan.

Of course, any strategy with tax implications should be reviewed by a qualified tax professional.

Traditional IRA Deduction Limits

Unlike Roth IRAs, there are no income limits with traditional IRAs. And you can deduct your contributions in full if you and your spouse don't have a 401(k) or some other retirement plan at work.

If either one of you is covered by a plan at work, however, the deduction may be reduced or eliminated. Here's the full rundown of IRA deduction limits for 2023:

Modified Adjusted Gross Income (MAGI)

The IRS uses your MAGI when it comes to IRA limits. This number can be close (or identical) to your adjusted gross income (AGI). It takes your AGI and adds back certain deductions, including:

• Half of any self-employment taxes
• IRA contributions and Social Security
• Losses from a publicly-traded partnership
• Passive income or loss
• Qualified tuition expenses
• Rental losses
• Student loan interest
• The exclusion for adoption expenses
• The exclusion for income from U.S. savings bonds
• Tuition and fees
  

To calculate your MAGI, find your AGI from your tax return. It's on line 11 of Form 1040: U.S. Individual Tax Return Definition, Types, and Use. Then, use Appendix B, Worksheet 1 from IRS Publication 590-A to modify your AGI for IRA purposes.

What If You Contribute Too Much?

It's good to max out your IRA contributions. But if you go overboard, the IRS considers it an ineligible (or excess) contribution. If you contribute too much or contribute to a Roth when your income is too high, you'll owe a 6% penalty on the excess contribution each year until you fix the mistake.

The good news is that there are several ways to fix your mistake:

• Withdraw the excess contribution and any earnings on it before the April tax deadline.
• If you've already filed your tax return, remove the excess contribution and earnings and file an amended tax return by the October deadline.
• Apply the excess to next year's contribution. You'll still pay the 6% penalty this year, but you'll be set going forward.
• Withdraw the excess next year by Dec. 31. You'll pay the penalty for two years and then move on.

Of course, it's best to avoid excess contributions altogether. Be sure to pay attention to the IRS' contribution limits for the year, keep track of your contributions, and watch your income. Just because you were eligible to contribute last year, it doesn't mean you still are.

The Saver's Credit

Many people with low to moderate incomes aren't even aware of the saver's credit, a dollar-for-dollar reduction of the taxes you owe. It was put into place in the early 2000s.

You could earn a credit of 10%, 20%, or 50% of your contributions, up to a dollar amount of $2,000 ($4,000 if married filing jointly) as long as you're eligible. The saver's credit is available to individuals, heads of households, and joint filers who contribute to an IRA, 401(k), or any other qualified retirement account, and whose adjusted gross income falls within certain parameters. You must be over 18, not a full-time student, and not listed as a dependent on anyone else's tax return to qualify.

The income thresholds are adjusted annually. Here are the saver's credit rates for 2023:

A married couple with an AGI of, say, $60,000 could save $400 on their 2022 tax bill by contributing $2,000 to each ($4,000 total) of their IRAs (the 10% level). If they managed to contribute $4,000 with an income below $43,500, their tax credit would be $2,000 (50% of their contributions).

The Bottom Line

Contribution limits apply to other types of IRAs, as well. For the self-employed and small business owners, the contribution limit for Simplified Employee Pension (SEP) IRAs and solo 401(k) plans is 25% of compensation, up to $61,000 in 2022.

If you have a Savings Incentive Match Plan (SIMPLE) IRA, you can make salary deferrals (salary reduction contributions) up to $15,500 for 2023. If you're age 50 or older, you can add an extra $3,500.

Any type of IRA is an excellent way to save for retirement. But to take full advantage of these accounts—and avoid any trouble or penalties—be sure to follow the rules for contribution, income, and deduction limits. The limits change periodically, so check back each year to make sure you comply.

Correction-March 7, 2022: Previous versions of this article listed alimony (spousal support) as unearned income. Since 2020, this form of income is now recognized as earned income.