Taxes and retirement

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This table shows whether your contribution to a Roth IRA is affected by the amount of your Modified AGI as computed for Roth IRA purpose.

married filing jointly or qualifying surviving spouse

< $230,000

up to the limit

married filing jointly or qualifying surviving spouse

> $230,000 but < $240,000

a reduced amount

married filing jointly or qualifying surviving spouse

> $240,000

zero

married filing separately and you lived with your spouse at any time during the year

< $10,000

a reduced amount

married filing separately and you lived with your spouse at any time during the year
 

> $10,000

zero

single, head of household, or married filing separately and you did not live with your spouse at any time during the year

< $146,000

up to the limit

single, head of household, or married filing separately and you did not live with your spouse at any time during the year

> $146,000 but < $161,000

a reduced amount

single, head of household, or married filing separately and you did not live with your spouse at any time during the year

> $161,000

zero

If the amount you can contribute must be reduced, figure your reduced contribution limit as follows.

1. Start with your modified AGI.
2. Subtract from the amount in (1):
   • $228,000 if filing a joint return or qualifying surviving spouse,
   • $-0- if married filing a separate return, and you lived with your spouse at any time during the year, or
   • $146,000 for all other individuals.    

1. Divide the result in (2) by $15,000 ($10,000 if filing a joint return, qualifying surviving spouse, or married filing a separate return and you lived with your spouse at any time during the year).
2. Multiply the maximum contribution limit (before reduction by this adjustment and before reduction for any contributions to traditional IRAs) by the result in (3).
3. Subtract the result in (4) from the maximum contribution limit before this reduction. The result is your reduced contribution limit.

For 2024, the total contributions you make each year to all of your traditional IRAs and Roth IRAs can't be more than:

• $7,000 ($8,000 if you're age 50 or older), or
• If less, your taxable compensation for the year

For 2023, the total contributions you make each year to all of your traditional IRAs and Roth IRAs can't be more than:

• 6,500 ($7,500 if you're age 50 or older), or
• If less, your taxable compensation for the year

Is my contribution to a traditional IRA deductible?

• Retirement plan at work: Your deduction may be limited if you (or your spouse, if you are married) are covered by a retirement plan at work and your income exceeds certain levels.
• No retirement plan at work: Your deduction is allowed in full if you (and your spouse, if you are married) aren’t covered by a retirement plan at work.

These charts show the income range in which your deduction may be disallowed if you or your spouse participates in a retirement plan at work:

• IRA deduction if you are covered by a retirement plan at work - 2024
• IRA deduction if you are not covered by a retirement plan at work - 2024 (deduction is limited only if your spouse is covered by a retirement plan)

Who can contribute to an IRA

There is no income limits for traditional IRA, however the amount you can contribute is limited to earned income throughout the year. This doesn't include earnings and profits from property, such as rental income, interest and dividend income, or any amount received as pension or annuity income, or as deferred compensation. In certain cases, other amounts may be treated as compensation for purposes of contributing to an IRA, including certain alimony and separate maintenance payments received, certain amounts received to aid in the pursuit of graduate and postdoctoral studies, and certain difficulty of care payments received. 

Contribution Limits 

The **backdoor Roth IRA** is a strategy used by high-income earners to contribute to a Roth IRA, even if their income exceeds the Roth IRA eligibility limits. Since high-income individuals are generally prohibited from contributing directly to a Roth IRA, the backdoor method allows them to bypass these limits.

Here’s how the backdoor Roth process works:

1. Contribute to a Traditional IRA: First, you make a non-deductible contribution to a Traditional IRA. There are no income limits for making non-deductible contributions to a Traditional IRA.

2. Convert to a Roth IRA: After contributing to the Traditional IRA, you convert the amount to a Roth IRA. The conversion is typically done shortly after the contribution to minimize taxable growth. The amount converted will be taxed if it includes any earnings, but if there are no earnings, only the original contribution amount is converted without taxes.

3. Tax Implications: If you have other pre-tax IRA accounts, the IRS uses the pro-rata rule, which may cause part of the conversion to be taxable. The pro-rata rule means the conversion will include a mix of both pre-tax and after-tax funds, and you’ll pay taxes on the pre-tax portion.

The backdoor Roth strategy allows high-income individuals to take advantage of the benefits of a Roth IRA, such as tax-free growth and withdrawals in retirement, without exceeding the income limits for direct Roth IRA contributions.

RMD (Required Minimum Distribution) is the minimum amount you must withdraw from certain retirement accounts, such as **Traditional IRAs**, **401(k)s**, and other tax-deferred retirement plans, once you reach a certain age.

Here are key points about RMDs:

1. Age Requirement:
  - As of 2023, you must begin taking RMDs starting at age 73 (formerly age 70½ before the SECURE Act). The age will increase to 75 in 2033.

2. Calculation:
  - The RMD is calculated based on your account balance at the end of the previous year and your life expectancy (using IRS life expectancy tables).
  - The formula divides the balance by your life expectancy factor to determine the minimum amount to withdraw.

3. Penalties:
  - If you fail to take your RMD by the deadline, you face a penalty of 50% of the amount that should have been withdrawn.

4. Account Types:
  - RMDs apply to Traditional IRAs, 401(k)s, and other employer-sponsored plans. They do not apply to Roth IRAs during the account holder's lifetime, although Roth 401(k)s require RMDs.

5. Timing:
  - The first RMD must be taken by April 1 of the year after you turn 73. Subsequent RMDs must be taken by December 31 each year.

RMDs ensure that funds in tax-deferred retirement accounts are eventually taxed, as the withdrawals are considered taxable income.

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