If you’re thinking of setting up an IRA, or you already have your Roth IRA or Traditional IRA, it’s important to know the annual contribution limits. This directly affects the amount of money you can save for your retirement, as well as any tax deductions that go along with it. But what are the contribution limits, what did they used to be, and where do they go from here?
When IRAs, Individual Retirement Accounts, were first introduced back in 1974, with the Employee Retirement Income Security Act of 1974, contribution limits were then only $1500 a year. Of course $1500 was worth more back then. As well, originally, if you were covered by any other sort of retirement plan you could not qualify for an IRA. But that all changed in 1981 with the Economic Recovery Tax Act. This new law changed the rules and made anyone under the age 70.5 eligible, whether they received retirement benefits from some other source or not, like their employer. What also changed in 1981 was the contribution limit for an IRA, which went up to $2000 per year. This was the first ever increase in the contribution limit for the IRA. There would be more coming. Everything has to try and keep up with inflation.
Keeping Pace with Inflation
Not only did the individual contribution limit increase $500 to $2000 in 1981, another very interesting aspect of the IRA was added as well. This new provision allowed for individuals to be able to contribute an additional $250 for any non-working spouse. Even though the trend towards increasing contribution limits was slowed in 1986 by phasing out certain deductions, especially among higher-earning individuals, by the 1990’s Congress was again in the mood to begin raising contribution limits and it did something more: it created the Roth IRA.
Contribution limits were again raised in 1996 when Congress passed the Small Business Job Protection Act of 1996. This raised the contribution limit on non-working spouses from $250 to $2000, equal to that of the working individual, in essence doubling the contribution limit for a working man if he was married. Even more changes came with the Taxpayer Relief Act of 1997. Here, Congress raised the income threshold, allowing more people who were not covered by employer-based retirement plan to participate in the IRA retirement plan.
More changes came with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). This was a big adjustment as not only did it begin raising the limit of contributions per year, but phased in what is known as the “catch-up.” This is where those people who are over 50 years of age can now begin contributing a little bit extra, in order to make up for any time lost. Beginning in 2002, IRA contribution limits began rising on a steady pace, gauged to keep up with inflation and not just raising the limits whenever Congress saw fit.
In 2002 the IRA saw its individual contribution limit rise to $3000. Then in 2005, $4000. By 2008 it went to the same level where it stands today, $5000 for any individual under the age of 50, $6000 for anyone over the age of 50. In addition, as the individual’s contribution rate went up so did the non-working spouse’s. Limits today are the same for a non-working spouse as they are for the actual individual IRA owner, $5000 for non-married spouses under the age of 50, $6000 if they are over the age of 50. So any one married household can contribute up to $10,000 a year if both parties are under 50, $12,000 if they are over 50. Over time, this money contributed, while accruing tax-free interest over maybe 20 or 30 years, can turn into quite a nest egg. Accumulating a retirement fund of well over a million dollars in that time span is easily achievable.
Traditional IRA Income Limits Back in 2010
The tax-deductibility of your contributions and therefore the net amount of your contributions depends upon your current income level. For the Traditional IRA, your modified Adjusted Gross Income, AGI, those limits were actually raised in 2010. If you file as a single person, then in 2010 those limits were raised to between $56,000 and $66,000 a year. If you are married, the new income levels were raised to between $89,000 and $109,000.
Traditional IRA Income limits for 2011
The tax-deductibility of your contributions in 2011 also depends upon your current income level. For the Traditional IRA, your modified Adjusted Gross Income limit was the same, but if you are married, the new income levels were raised to between $90,000 and $110,000.
Roth IRA Income Limits Back in 2010
The tax-deductibility of your contributions and therefore the net amount of your contributions also, for your Roth IRA, depends upon your current income level. For the Roth IRA, your modified Adjusted Gross Income was raised in 2010. If you file as a single person, then in 2010 those limits were raised to between $105,000 and $120,000 a year. If you are married, the new income levels were raised to between $167,000 and $177,000.
Roth IRA Income Limits for 2011
The tax-deductibility of your contributions in 2011 to you Roth IRA also depends upon your current income level. For the Roth IRA, your modified Adjusted Gross Income limit if you file as an individual went up to $107,000 and $122,000. If you are married, the new income levels were raised to between $169,000 and $179,000.
So you see, with the Roth IRA income levels may be higher. This is another reason the Roth IRA is more appealing to those in the higher income brackets. And as you can see, income levels have a direct affect upon how much you can contribute to your IRA. Of course, these income level limits are specific to each year individually. This doesn’t mean that if in one year you make over the limit you have to close your IRA down. This just means that in that particular year you cannot contribute as much. If the following year you income goes back down, you may contribute more again. You can see how income levels directly affect your ability to contribute and this the contribution limits.
The Future and your Contribution Limits
In the future, the maximum contribution limits will go up incrementally as to keep up with the rate of inflation. No longer will Congress be deciding to raise the limit of your IRA contribution whenever they feel in the mood. There is now going to be a standard for raising this contribution limit incrementally. These limits will rise in increments of $1000 at a time. The catch-up payment will also rise at the same time that the regular contribution limit does.
It’s important to remember that your contribution limits are not just a straight-line number. Yes there are the basis figures, right now $5000 and $6000, but the amount you may contribute also involves what your income levels are. The higher your income (once you are over the maximum-deductibility limit), the less you may contribute. This is an adjustable scale and as your income rises, your contribution lessens. You can always find this information online or just ask for IRA administrator.