Roth IRA contributions may qualify for a tax credit at the time you make them, but the credit and your contributions are both capped based on your income and filing status. You can only contribute a certain amount to an IRA each year. Learn more about how to maximize the contributions you choose to make to a Roth IRA.
Roth IRA Contribution Limits
Roth IRA contributions are limited to $6,000 a year as of 2022, unless you’re age 50 or older. You can make a “catch-up” contribution of an additional $1,000 a year in this case, or $7,000 annually, as you count down your years to retirement. But there’s a catch. The limit is less if you don’t earn at least $6,000 or $7,000 a year. The Internal Revenue Code provides that you can contribute up to these amounts, depending on your age or your taxable income for the year, whichever is less. Your contributions are also capped if you earn over a certain threshold. The amount you can save each year is reduced based on your modified adjusted gross income. Here’s how that works out in tax year 2022: Married taxpayers who file joint returns get a bit of a break when it comes to the rule that annual earnings have to exceed these limits. You can contribute up to the amount of your combined earnings (or $6,000/$7,000, whichever is less) if your spouse worked, even if you didn’t earn any income.
Roth 401(k) Plans
The “Roth” designation on any account indicates that your contributions aren’t tax-deductible in the year you make them. This rule applies to employer-sponsored 401(k) plans as well. Earnings on these accounts are typically tax-free in retirement. The limits for these Roth 401(k) savings plans are much more generous than for Roth IRAs: $20,500 in 2022. The catch-up contribution limit for those who are age 50 or older is $6,500, for a total of $27,000.
Roth IRA vs. Traditional IRA Contributions
The $6,000 or $7,000 limit or the cap of the amount of your taxable income does not apply to each IRA account individually. You might have a Roth IRA and a traditional IRA, but you can’t contribute $6,000 to each of them. The cap applies to all your IRAs collectively. Keep in mind that traditional IRAs are tax-deferred savings plans. You’re simply delaying paying taxes on the money you contribute. The earnings of the money you contributed is taxable, too, unlike with the Roth IRA option.
The Saver’s Tax Credit
Traditional and Roth IRAs share another common feature: The Saver’s Tax Credit is available to those who contribute to either of these types of IRAs. The credit is equal to 50%, 20%, or 10% of your contributions up to $2,000 in 2022, or up to $4,000 if you’re married and filing a joint return. Your tax credit would be $1,000 if you’re single and you qualify for the 50% credit. There are income limits to this tax credit, too, and these are much more stringent than those that apply to your contributions. The percentages are based on the following adjusted gross incomes:
What To Do if You Contribute Too Much to Your Roth IRA
The rules for contributions are multilayered enough that it can be easy to surpass your contribution limit. If you do, the IRS will tax 6% of the overage for as long as the money remains in your IRA, up to 6% of the value of all your IRAs combined as of the end of the tax year. You can avoid the tax if you realize your mistake and act quickly enough. You have until the due date for that year’s tax return to take the money out again, along with any earnings on that money while it was in your Roth IRA. You would have until April 2023 to pull back excess 2022 contributions, or until October 2023 if you ask the IRS for an extension of time to file your tax return. You also have the option of allocating the excess contribution to the current or previous year’s limit if you made it from January through April.
