How Knowing About Contribution Caps Will Help Increase Your Roth IRA

Understanding your Roth IRA contribution limits is critical to maximizing your tax savings and benefits potential. It's also important to be able to prepare in advance. Instead of scrambling around at tax time every year desperately looking for money, you can be prepared and save for your IRA contributions throughout the tax year.

That's why it's critical to keep track of Roth IRA contribution limits and other pension saving restrictions on an ongoing basis. That way you can plan ahead and make sure you have the funds on hand to maximize your savings and tax breaks. But, how do you do that, and what are those limitations? Keep reading to find out.

401K Contributions and Limits

Though not directly related to a Roth IRA, your 401(k) is interconnected. Two years ago, the U.S. government made a temporary law that allowed higher 401(k) contributions a permanent statute. Now, you can contribute up to $15,500 per year, and people over the age of 50 can play catch up by adding an additional $5000 annually.

Limits on Roth IRA Contributions

Roth IRA contributions sit at a low limit of $5000 for those under the age of 50. That equals out to almost $417 each month. But, if you're 50 and older, you can defer $6000 to your IRA. Those limits are set to increase annually in $500 increments, based on current inflation rates.

If you participate in a work-based retirement savings plan and want to move your deductions over to a Roth IRA, there are new limitations in place that could affect that decision.

Essentially, if your Modified Adjusted Gross Income is between $95,000 and $110,000 or higher for a single person or $150,000 - $160,000 or higher for a married person, you may no longer be able to deduct contributions to work IRA plans.

SIMPLE IRA plans

SIMPLE IRAs are funded both by voluntary salary deductions and employer contributions. Employees, if eligible, can contribute up to 100% of their yearly salary or $11,000, whichever of the two amounts is less. If you're 51 or over, you can make additional annual contributions of up to $2500 - bringing your annual limit to $13,500.

Limitations on Roth IRA Catch Plans

If you're 50 or over and want to make catch-up contributions to your retirement savings (Roth IRA, traditional IRA, 401(k)), you are limited to $5000 in additional payments per year. Of course, you can contribute more to a 401(k), but these are tax-deductible limitations.

Remember, before you invest and start saving for your retirement, make sure you understand your limitations, including your Roth IRA contribution limits, so you can best maximize your tax benefits.