How Much Can You Put in an IRA This Year?

If you have an IRA, or are considering opening one, you might be wondering how much you can contribute every year. How much you can contribute to an Individual Retirement Account (IRA) depends on your age, your income, the IRA type, and whether you also contribute to an employer-sponsored retirement plan.

There are two types of IRAs: traditional and Roth IRAs. Both have set contribution limits, as well as other guidelines. With an IRA, an investor typically has to find one that fits their needs. A report from 2019 reveals that only 36 percent of U.S. households owned an IRA.

Related: What Is an IRA?

According to the Internal Revenue Service, for tax years 2020 and 2021, investors can contribute a total of $6,000 into IRA accounts. (If you’re 50 or older, you can contribute $7,000.)

What Is an IRA?

An IRA stands for Individual Retirement Account. IRAs allow people to make tax-deferred investments that they can use in retirement. There are several different types of IRAs, including traditional IRAs and Roth IRAs. You can set up an IRA with a bank, insurance company, or other financial institution.

What types of IRAs are available?

Traditional IRA

A retirement investor’s contributions to a traditional IRA are typically tax-deductible. Investors won’t pay taxes on earnings with a traditional IRA. When investors reach retirement age, they’ll pay taxes on withdrawals because they’re taxed like income. It’s almost like paying yourself a salary in retirement and paying income taxes on those payments.

Related: How an IRA Works

Roth IRA

Contributions to a Roth IRA are made after taxes and aren’t tax-deductible. With a Roth IRA, earnings aren’t typically taxed, but investors won’t have to pay taxes on withdrawals from a Roth IRA when they reach retirement age and start using the funds in one of these accounts.

Sep IRA

A Sep IRA is a simplified employee pension IRA. These IRA accounts help small businesses or self-employed retirement investors make contributions to an IRA in the employee’s name.

Simple IRA

A SIMPLE IRA plan (Savings Incentive Match PLan for Employees) is an account that most resembles a traditional 401K. This savings incentive match plan for employees can be set up by small businesses that don’t have any other retirement plans. Like a 401(k), this IRA lets employees and employers contribute, but with lower costs and fewer administration fees than a typical 401(k).

Related: How to Open Your First IRA

How Much Can You Contribute to an IRA Each Year?

If you’re younger than 50, you can contribute a combined maximum of $6,000 annually to a traditional IRA or a Roth IRA.

After 50, you’re allowed to make “catch-up” contributions, so the cap goes up to $7,000 a year. Previously, you could not make contributions to a traditional IRA once you reached the age of 70.5. But starting in 2020, there is no age limit; there’s also no age limit for a Roth IRA.

Limits for Roth IRA and traditional IRA contributions for the tax year 2020 and 2021:

•  Under age 50: $6,000
•  Age 50 and older: $7,000

Related: What Is a Roth IRA?

However, there are a few exceptions to the retirement contribution limits. If you make less than the limit in taxable income, you can only contribute up to that amount. On the other end of the spectrum, if you make too much, you can’t contribute to a Roth IRA or may only be able to contribute a reduced amount.

If you’re younger than 50, you can contribute a maximum of $6,000 annually into any type of IRA.

For 2020, if you’re single, you can put in a reduced amount into a Roth IRA if you make between $122,000 and $137,000; above that, you can’t contribute anything.

Related: Traditional vs. Roth IRA: How to Choose the Right Plan

For a married person filing jointly, you can contribute a reduced amount into a Roth IRA if you make between $193,000 and $205,000. (The limits are based on modified adjusted gross income .)

If you already contribute to a 401k or another retirement plan at work, you can still contribute to an IRA.

However, you may not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work. Roth IRA contributions might be limited if your income exceeds a certain level.

Related: 3 Easy Steps to Starting a Retirement Fund

Still unsure which IRA account you can contribute to? Use SoFi’s IRA Calculator to help you make an informed decision.

How Do I Open an IRA?

Investors thinking about opening an online IRA may want to consider whether a Roth or a traditional IRA makes sense.
Roth IRAs have some limitations that might preclude investors from getting one.

Investors who make more than $206,000 in adjusted gross income a year filing taxes jointly or $139,000 a year filing single may not be eligible to open a Roth IRA.

Vital information needed to open an IRA includes a driver’s license or ID, Social Security number, banking info like routing numbers to fund the account, name, and address of employer, and beneficiary information. After that, investors choose an asset mix and investment type that makes sense for their goals.

Related: The 7 Most Common Questions About IRAs

How Do I Roll Over Funds into an IRA?

Some investors might be thinking about opening a traditional IRA because they have left a job where they had a retirement account and want to move those funds to a new account (or they want to open a Roth IRA and roll over a Roth 401k). Reasons for doing this include the new investment company offers more investment options or the employee seeks more control over the funds or wants to combine funds from another retirement account with the employer-sponsored account.

Generally, funds from this type of account can be rolled over into a new account within 60 days.
The advantage of rolling over one retirement to another account is that investors don’t lose those funds’ tax-deferred status. If investors don’t roll over the funds, they do become taxable.
There are three ways investors can rollover retirement funds into an IRA.

Related: IRA Rollover Rules

Direct rollover

An investor’s old retirement funds administrator, perhaps at a previous job, sends funds directly to the new to an IRA or new employer-sponsored retirement plan. The investor won’t pay taxes or a penalty on this transfer as long as the transferred funds are going to a similarly classified account (Roth to Roth or 401k to traditional IRA).

Trustee-to-trustee transfer

If an investor is getting funds from an IRA, they can ask the financial institution that administers the old IRA to send funds to the new IRA. The investor won’t pay taxes or a penalty on this transfer.

Late or 60-day rollover

The IRS gives people 60 days from the date they receive a distribution from an IRA or retirement plan to roll it over to another plan or IRA. If you roll over after the 60 days has passed, it’s considered “late,” and the distribution will be taxed—and you’ll have to pay a penalty if you are younger than 59.5 years.

Related: IRA Transfer vs. Rollover: What’s the Difference?

Can You Withdraw from an IRA Before Retirement?

It depends. With a Roth IRA, there are situations–like buying your first home, adoption costs, or paying for higher education–where you can withdraw your contributions with no penalties or taxes. For example, an investor can take out up to $10,000 from a traditional IRA—or in earnings from a Roth IRA—without penalties for expenses associated with buying a first home.

Investors can also withdraw funds penalty-free for qualifying medical or educational expenses. And once you hit the age of 59.5, distributions will always be penalty-free.

Here are all the exceptions for early distributions:

•  Made to a beneficiary or estate on account of the IRA owner’s death
•  Made because you’re totally and permanently disabled
•  Made as part of a series of substantially equal periodic payments for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary
•  Qualified first-time homebuyer distributions
•  Not in excess of your qualified higher education expenses
•  Not in excess of certain medical insurance premiums paid while unemployed
•  Not in excess of your unreimbursed medical expenses that are more than a certain percentage of your adjusted gross income
•  Due to an IRS levy of the IRA under section 6331 of the Code
•  A qualified reservist distribution
•  Excepted from the additional income tax by federal legislation relating to certain emergencies and disasters (see the Instructions for Form 5329 for more information), or
•  Not in excess of $5,000, and the distribution is a qualified birth or adoption distribution (see the Instructions for Form 5329 for more information)

Related: Should You Use Your Roth IRA to Buy Your First Home?

Are There Ways to Get Around IRA Contribution Limits?

Sometimes. There’s no limit to how much you can put into an IRA when you’re rolling over funds from a 401(k) or 403(b) account.

Some people also use what’s called a “backdoor Roth IRA” to get around the income limits to contribute to a Roth IRA. This involves contributing the maximum to a traditional IRA, then converting it into a Roth. (There’s no income limit for conversions.) Consult a tax professional to understand all the tax implications.

Is an IRA a Replacement for a 401(k)?

American workers have access to a 401(k) retirement plan through their employers. And, some investors might even be able to get additional 401(k) contributions in the form of an employer match. Investors who have access to a 401(k) and an IRA might be able to accelerate their retirement savings and put themselves in a better financial situation when they reach retirement age.

Related: Should You Open An IRA If You Already Have A 401(k)?

The Takeaway

The rules of IRAs can be complicated, but investing in one doesn’t need to be. SoFi Invest® is all about empowering you and your financial future. Prepare for retirement with a SoFi active or automated Roth or Traditional IRA from SoFi Invest.

Need tips on IRAs or saving for retirement in general? SoFi members can schedule a complimentary personal consultation with one of our credentialed financial advisors to answer their questions.

Looking to open a SoFi traditional or Roth IRA? Learn more about SoFi Invest today.



SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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Roth IRA Early Withdrawals: When to Withdraw + Potential Penalties

When it comes to saving for retirement, there are a multitude of options available to help you do just that. One of the more popular options people choose is an IRA, also known as Individual Retirement Account. The two main IRAs are Traditional and Roth IRAs and they can be used as alternatives to the traditional 401K.

An IRA is an investment account that allows workers to invest their earned income to encourage them to set aside money (earnings) for retirement. Unlike the traditional IRA, Roth IRAs are non tax-deductible which means you do not have to pay taxes when you qualify for your withdrawal. For this reason, Roth IRAs have become very popular.

If you decide to apply for a Roth IRA, it’s extremely important to be aware of the general rules and penalties associated when managing your account. Check out these simple rules and regulations associated with Roth IRAs.

Roth IRA vs Traditional IRA

Like we mentioned before, an IRA is an investment account that is designed to encourage workers to invest in retirement. With both Traditional and Roth IRAs, your contribution limit generally is the lesser of:

  • $6,000 ($7,000 if you are age 50 or older), or
  • Your taxable compensation.

Both options also allow you to invest in a variety of different investments such as stocks, bonds, mutual funds, annuities, exchange traded funds (ETFs), index funds, and so on.

ROTH IRA TRADITIONAL IRA
Contributions made with after-tax dollars. Contributions made may be tax-deductible.
Your earnings grow tax-free. Your earnings grow tax-deferred.
You don’t pay income tax on distributions. You pay income tax on distributions.
Contribution limit based on filing status and income thresholds. Contribution limit is not based on income thresholds.

So what’s the difference between a Roth IRA and a Traditional IRA? The primary difference between the two is the way they are taxed. With a Traditional IRA,  the amount you can contribute annually (up to $6,000) can be deducted from your taxable income which reduces the amount of income tax you’ll owe for the year–providing immediate benefits. However, when you withdraw your money in retirement, you will be taxed on those withdrawals.

On the other hand, contributions to a Roth IRA are non-tax deductible, but qualified withdrawals are tax and penalty free. Roth IRAs also offer flexibility with non-taxable withdrawals compared to a 401K. With that being said, Traditional IRAs are best if you think your tax bracket will be lower by retirement and Roth IRAs are better if you anticipate taxes to be higher when you retire.

When Can I Withdraw From My Roth IRA?

When Can I Withdraw From My Roth IRA?

The contributions you make with a Roth IRA are not tax-deductible, but earnings can grow tax-free. Roth IRA withdrawal rules vary depending on your age and how long you’ve had the account. You can withdraw from your Roth IRA at any time, but before you make a withdrawal, keep in mind these guidelines so you can avoid the potential 10% early withdrawal penalty:

  • You must be the age of 59 ½  or older to make a withdrawal
  • You must have your Roth IRA for at least 5 years before you make a withdrawal

If you don’t qualify for withdrawal based on your age or how long you’ve had your account, have no fear, there are still exceptions to the early withdrawal penalty.

Exceptions to the Early Withdrawal Penalty

If you need to make an early withdrawal, but are under the age of 59 ½ or have not had your Roth IRA for at least 5 years, there are exceptions to the Roth IRA early withdrawal penalty.

You can avoid the Roth IRA early withdrawal penalty if you use the withdrawal:

  • to pay for a first-time home purchase
  • to pay for qualified education expenses
  • to pay for birth or adoption expenses
  • to pay for unreimbursed medical expenses or health insurance if you are unemployed

Unfortunately, if you don’t qualify for withdrawal or for the exceptions, you’ll have to pay taxes and penalties in order to withdraw from your Roth IRA.

Roth IRA Withdrawal Penalties and Rules to Consider

It is advisable, if possible, to avoid making an early withdrawal from your Roth IRA. Even though you can withdraw up to the total of your contributions at any time, once you have withdrawn your contributions, you will be hit with taxes and penalties if you don’t meet a qualified withdrawal or are under the age of 59 1/2. There may still be penalties if the account is younger than 5 years too.

Once you start dipping into your account’s earnings, it may be subject to a 10% early distribution penalty because that amount is considered taxable income and therefore the money would be treated as income.

Another thing to consider is the tax implications associated with a Roth IRA. If you contribute to your Roth IRA and then decide to withdraw within the same year, the contribution you make is treated as if it were never made as long as the distribution is taken prior to your tax filing date. However, keep in mind that you would have to report those earnings as investment income.

Roth IRA Withdrawal Penalties and Rules to Consider

Pros and Cons of Withdrawing

When it comes to withdrawing, there are pros and cons to consider before making a decision. Weigh your choices and decide whether withdrawal is the best option for you.

Pros:

  • Roth IRA withdrawals are tax-free and penalty free when withdrawing contributions
  • You can possibly avoid the tax and penalty associated with early withdrawal in certain situations

Cons:

  • Most of the time, early withdrawal of the portion of the distribution allocable to earnings may be subject to tax and it may be subject to the 10% additional tax
  • Once you withdraw, you cannot pay back the money to your IRA account
  • If you withdraw early, you will miss out on years of growth

In summary:

  • Roth IRAs are investment accounts that are non-tax deductible, but qualified withdrawals are tax and penalty free
  • To qualify for a withdrawal from your Roth IRA, you must be over the age of 59 ½ and have the account for at least 5 years
  • If you don’t meet the qualifying requirements or the exceptions, your earnings may be subject to a 10% early distribution penalty
  • Once you withdraw from your Roth IRA account, you cannot pay back the money and you will miss out on years of growth in your earnings

With all that being said, the decision to withdraw from your Roth IRA  should not be taken lightly. It is important to manage your money responsibly and make smart financial decisions so you can maintain your credit history.

Sources: Investopedia | IRS

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