Individual Retirement Accounts (IRAs) are one of the most popular tools for building retirement savings: More than a third of U.S. households have an IRA. But each year, the IRS adjusts the rules for IRA eligibility based on inflation. In 2022, those adjustments will make a big difference in who can contribute to a Roth IRA, and who can deduct their contributions to a traditional IRA from their taxable income.
For traditional and Roth IRAs, you can contribute $6,000 for 2022, which is unchanged from 2021. Retirement savers age 50 and older can chip in an extra $1,000 a year as a catch-up contribution, so $7,000 in all, also unchanged from 2021. A person who starts contributing at age 50 can sock away $105,000 in an IRA by age 65, excluding any investment returns on the principal; a couple could save $210,000.
A traditional IRA allows you to deduct your contribution from your income, which can reduce your taxes and make it easier on your budget to save. For example, suppose you’re in the 24 percent federal income tax bracket. In order to save $7,000 for retirement in a fully taxable account, you would have to earn about $9,211 before taxes. With a traditional IRA, however, you can deduct that $7,000 contribution, meaning that to get $7,000 to invest, you only have to earn $7,000. (You can only contribute earned income to an IRA; investment income and Social Security benefits don’t count.)
If you (or your spouse) don’t have a retirement plan of any kind, you can take the full deduction for an IRA. If you do have a retirement plan available from your employer — even if you don’t take advantage of it — your ability to deduct a traditional IRA contribution is limited by your modified adjusted gross income (MAGI), which is your adjusted gross income on your 1040 or 1040-SR tax form, minus certain deductions, such as student loan interest.
|Traditional IRAs — 2021 vs. 2022 deduction limits|
|Filing status||2021 MAGI||2022 MAGI||Deduction|
|Single or head of household||<$66,000||<$68,000||Full deduction|
|>$66,000 and <$76,000||>$68,000 and <$78,000||Partial deduction|
|Married filing jointly or qualified widow(er)||<$105,000||<$109,000||Full deduction|
|>$105,000 and <$125,000||>$109,000 and <$129,000||Partial deduction|
|Married filing separately||<$10,000||<$ 10,000||Partial deduction|
You can’t avoid paying taxes on your traditional IRA contributions, as well as any investment gains, forever. When you start taking withdrawals after age 59 1/2, your withdrawals are taxed at your regular tax rate. For example, if you are in the 24 percent tax bracket and you take out $7,000, you’ll get $5,320 after federal income taxes. In addition, you must take required minimum distributions (RMDs) from your IRA after age 72, based on IRS life expectancy tables.
If you take a withdrawal from your traditional IRA before age 59 1/2, you’ll have to pay an additional 10 percent penalty on the entire amount you withdraw. If you are 58 years old and take $7,000 from your IRA, for example, you’ll owe a $700 tax penalty in addition to any federal and state income taxes on the entire amount you withdraw.
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Contributions to a Roth IRA aren’t deductible, but you pay no taxes when you withdraw your contributions at any age. And if you make a qualified withdrawal after you hit age 59 1/2, you pay no taxes on your earnings, either. (You must also have started your Roth IRA account at least five years before taking withdrawals from your earnings.) There are no RMDs for Roth IRAs.
There’s one catch: Your ability to make contributions to a Roth IRA are limited by your federal income tax filing status and your MAGI.
The table below shows the income limits for 2022 for making Roth contributions. As with traditional IRA contribution limits, the Roth income limits are adjusted for inflation each year.
|Roth IRA — 2021 vs. 2022 contribution limits|
|Filing status||2021 MAGI||2022 MAGI||Contribution|
|Single or head of household||<$125,000||<$129,000||Full contribution|
|>$125,000 and <$140,000||>$129,000 and <$144,000||Partial contribution|
|Married filing jointly or qualified widow(er)||<$198,000||<$204,000||Full contribution|
|>$198,000 and <$208,000||>$204,000 and <$214,000||Partial contribution|
|Married filing separately||<$10,000||<$10,000||Partial contribution|
John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger's Personal Finance and USA Today and has written books on investing and the 2008 financial crisis. Waggoner's USA Today investing column ran in dozens of newspapers for 25 years.