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IRA Contribution Limit

Have you reached your IRA contribution limit this year? If you haven’t, you may be doing yourself a huge disfavor. If you are like the average American, you are going to have a long retirement that far outlasts your economic resources. This, however, can be avoided by contributing up to yourlimit whenever possible. Every year, the United States government sets limits on how much money citizens can allocate to their individual retirement account from their before tax income. Knowing this maximum limit and investing exactly that amount is essential to maximizing your retirement savings and keeping your annual tax bill as low as possible.

The IRS sets a new contribution limit every year to allow for inflation and raises in the cost of living. This amount, which was $5000 in 2008, is the most money you can take from your pre-tax income to put toward this proven method of investing. There is also an additional amount that people fifty years of age or over can contribute, which is called a ‘catch up contribution’. This allows people who are nearing retirement to pad their account a little more, and can be a huge advantage for those who are not yet totally prepared for their impending retirement. However, this is not the IRA contribution limit for a person’s combined retirement accounts. Even if a person has two accounts, they cannot save the maximum amount in each. Although diversification in a variety of plans is a good long term strategy, it does not have an effect on the amount of pre-tax income a person can invest to their IRA.

The maximum limit is not the only contribution limit, but rather a general guideline. Special circumstances may lower or raise the amount people are allowed to save. For instance, many employers have plans that cap contributions below the IRS contribution. In this case, an employee cannot put the maximum legal amount toward their retirement plan. In most cases, you will have to examine both the IRS limits of that year as well as the limits set by your individual plan and go by the lowest number.

The government wants people to save for their retirement, both in traditional accounts and in tax deferred accounts such as an IRA. Although the confusing and often conflicting rules regarding the IRA and the contribution limit can be difficult to sort through, the most essential thing is that people open their accounts and contribute to them on a regular basis up to their personal maximum IRA contribution limit. Whatever the IRA contribution limit in any particular year, the most important aspect of planning for your retirement is to research the maximum amount of pre-tax income you can put toward your individual retirement account and then to contribute that precise amount. These accounts allow you to save for your retirement as well as to lower your tax burden, which is a good deal that no one can afford to pass up.

IRA Contribution Limit
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