Over 45 million people in the US have an IRA. However, only about 12% of people with IRAs contributed to the account in 2020. While we understand that 2020 was a tough year for everyone, this statistic causes us to wonder if people simply aren’t investing because they don’t understand the benefits.
And, part of understanding the benefits means understanding IRA contribution limits. When we say contribution limits, we’re talking about the maximum amount you can contribute to your IRA account each year. For a traditional IRA account, for example, you can contribute up to $6,000 in 2022. And, this means that if you max out that contribution, you will effectively lower your taxable income by $6,000. That’s quite a lot!
There are, of course, other benefits of maxing out your contributions each year. But, we’ll get to those in a bit. First, let’s walk you through the IRA contribution limits for 2022.
IRA Contribution Limits for 2022
It’s important to remember that when you have an IRA it’s not as simple as that. There isn’t just one contribution limit for IRAs across the board because there are numerous types of IRAs. Each comes with its own contribution limits and other details that you’ll need to understand before contributing, filing taxes, etc.
However, let’s go over the contribution limits for some of the most popular types of IRAs.
What Are the 2022 Traditional & Roth IRA Contribution Limits?
Okay, so we just told you that there isn’t one set number that constitutes a contribution limit for all of your IRA accounts, but let’s actually take a step back. If you have either a traditional IRA or a Roth IRA, or both, you can contribute up to a maximum of $6,000 in 2022 across both accounts.
However, if you’re an IRA saver above the age of 50, you’re eligible to make a catch-up contribution of a maximum of $1,000 in 2022. This brings your total contribution limit to $7,000.
What’s an IRA saver? It’s someone who qualifies for the IRS’ saver’s tax credit. To qualify, you have to first be contributing to an employer-sponsored retirement IRA plan (either traditional or Roth). And, you can’t be claimed as a dependent on anybody else’s tax returns. The credit you’ll receive as an IRA saver can be either 10%, 20% or 50% of your eligible contribution, depending on your annual income. However, the maximum is $2,000 for heads of households and $4,000 for married couples filing jointly.
If you’re unsure whether you qualify for the IRS’ saver’s tax credit, we suggest speaking with a tax professional to ensure that you’re contributing the absolute maximum amount each year to your IRA account.
What Are the 2022 SIMPLE IRA Contribution Limits?
SIMPLE stands for Savings Incentive Match Plan for Employees and it’s a retirement plan that allows employees and employers to contribute to traditional IRAs set up specifically for employees.
Now, for a SIMPLE IRA account, the contribution limits are different. The maximum contribution for a SIMPLE IRA account as an employee is $14,000 in 2022. Employees older than 50 are able to make additional catch-up contributions (as long as the plan allows it) up to $3,000.
However, and this is the real catch, there is no limit on employer matching contributions to a SIMPLE IRA account; if they opt for a 2% contribution based on compensation, employer matching is allowed on up to $285,000 of your salary.
What Are the 2022 SEP IRA Contribution Limits?
Don’t work for a company offering an IRA? And, don’t own a business quite big enough to make investing in a SIMPLE IRA plan worth it? A SEP IRA is another great option for those who are self-employed or small business owners.
SEP stands for Simplified Employee Pension and it’s basically a traditional IRA specifically for small business owners and freelancers/self-employed workers. If you’re a solo business owner, contributions are tax-deductible, which can help you reduce your yearly tax burden!
And, the great news is that the contribution limits to a SEP IRA are pretty high. For 2022, a self-employed business owner can contribute as much as $61,000 to their SEP IRA account. However, unlike the other types of IRA accounts, there are no catch-up contributions allowed with SEP IRAs.
Why Do Contribution Limits Matter?
Okay, so by now you might be thinking, “Why do contribution limits matter? It’s my money and it doesn’t matter if I invest it now or in five years. I’m not even close to retirement.” That’s a fair question, and it’s one that many people have. But, we’re here to tell you that that kind of thinking is entirely wrong.
IRAs, and other types of retirement accounts, help you build wealth through compound interest. With compound interest, you’re not just earning money with your original contributions alone. So, if you invest the maximum of $6,000 this year in your traditional IRA, you’re not just going to have that same $6,000 in your account next year. Even your interest earns interest, and that compounds each year (or even monthly, depending on the terms of your account).
Compound interest can benefit you if you’re saving or investing for the long-term, especially if it runs for decades (so start now, millennials). The best part about this whole thing is that you don’t have to do anything. You’re not playing the stock market, and you’re not investing in some wild “get rich quick” scheme (that doesn’t work). The interest on your money simply compounds and grows your savings over time.
Get Your IRA with Wealth Stack
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