Determining the IRA Contribution Limits for 2024

Understanding the IRA Contribution Limits in 2024

The Internal Revenue Service (IRS) sets the contribution limits for Individual Retirement Accounts (IRAs) to ensure that individuals can save for their retirement amidst rising inflation. These limits are adjusted annually to account for cost-of-living changes and typically announced in October or November, ready for the upcoming tax year.

What Determines the Amount Allowed for an IRA Contribution?

The most crucial factor in determining your IRA contribution limits is your earned income. Specifically, only the portion of your income that is subject to Social Security and Medicare taxes (also known as FICA taxes) determines your contribution limits. This ensures that employees, self-employed individuals, and freelancers are treated fairly in their retirement savings efforts.

Eligibility for Traditional and Spousal IRA Contributions

Your annual contribution limit for a traditional IRA and a spousal IRA is determined as follows:

Traditional IRA: The amount you can contribute is the lesser of 100% of your FICA-taxed earnings or the statutory maximum. This limit applies to both traditional and spousal IRAs. Roth IRA: Similar to traditional IRAs, you can contribute to a Roth IRA with the same limitations. However, if you are paying any taxes this year, it is generally advisable to contribute to a traditional IRA, as it provides immediate tax benefits. If your expected return on investment over the next five years is 20% or more, then a Roth IRA might be the better choice. Contributions can be mixed and matched as long as they do not exceed the legal maximum combined.

Please note that separate contribution limits apply to 401(k) plans, SEP IRAs, and Solo 401(k)s, which are intended for employees and self-employed individuals.

Annual IRA Contribution Limits for 2024

The IRS has announced that the 2024 IRA contribution limits for individuals under 50 are $7,000, while those over 50 can contribute up to $8,000. Meanwhile, 401(k) contribution limits for 2024 are set at $23,000, providing a significant opportunity to boost your retirement savings.

For 2023, individuals under 50 can contribute up to $6,500, while those over 50 can contribute up to $7,500. These amounts are effective until April 15th of the following year, giving you ample time to make your contributions.

It is essential to act quickly, as missing the deadline can result in lost tax benefits and reduced savings over time. Ensure that you allocate enough of your earnings to meet these limits, particularly if you want to maximize your retirement savings.

Contributing to Your IRA on a Paycheck Basis

For individuals who plan to make the maximum contribution annually, it's important to determine how much you need to contribute per paycheck. For the 2024 limit:

For individuals 50 or over: The contribution amount is based on dividing your annual limit by the number of expected pay periods. If the limit is $8,000, then you would contribute approximately $140 per paycheck. For individuals under 50: The contribution amount would be roughly $140 per paycheck for the $7,000 limit.

You can make your contributions anytime throughout the year, including on January 1st or any other date, up to the tax filing deadline (not including extensions). Remember, when you make a contribution, you need to specify the tax year to which the contribution is being made.

Conclusion

To effectively manage your IRA contributions, it's essential to understand the legal limits and how they are determined. By following the guidelines and contributing consistently over time, you can secure a more comfortable financial future.