IRAs are a great way to start saving for retirement. Unlike a 401(k), IRAs are not employer-sponsored, and anyone with an income can open up an account. While your employer sets up 401(k)s, you can set up an IRA savings account with a bank, credit union, online brokerage, personal brokerage, or investment account. Typically, IRAs are an excellent option for anyone, as everybody with an income is eligible. This article will explain what an IRA is and go over the 2022 IRA contribution and income limits, Roth IRA limits for 2022, and other types of IRAs.
As mentioned above, anyone with an income can set up and contribute to an IRA. So whether your employer doesn't have a 401(k) retirement plan, or you already have set one up, either way, you can set up an IRA. The only limitation is on the total sum of contributions across all of your retirement accounts, which we will discuss in more detail below.
IRAs are a flexible way to invest your money for retirement. When you open an account, you can choose to invest your money in various financial options, including ETFs, mutual funds, stocks, and bonds. One option gives the investor the freedom to make all the investment decisions and access an even more comprehensive range of investments, called self-directed IRAs (SDIRAs).
2022 IRA Contribution and Income Limits
Unfortunately, unlike 401(k)s, the contribution limit for IRAs did not increase in 2022. Luckily, the income ranges for traditional IRA deductions did increase. If you're younger than 50 years, the maximum amount you can contribute to your IRA remains at $6,000. On the other hand, employees 50 years and older can contribute an additional $1,000 as catch-up contributions, making the maximum for those eligible $7,000. You also must have earnings from work to contribute, and you can only contribute as much as you earned (if it does not exceed this limit) and no more. You also need earnings from work to contribute. In addition, you can only contribute as much as you earn as long as it doesn't exceed the limit.
In addition, it is possible to deduct your total IRA contribution from your tax return if you don't have a work-sponsored retirement plan, like a 401(k). However, what if you have both an IRA and 401(k)? Then, depending on your income, you may be able to deduct a portion of your IRA contribution. The amount of income you can have and still get a full or partial deduction has increased from 2021 to 2022. Singles making $68,000 or less and joint-filers making up to $109,000 can receive a full deduction for 2022. All income above the listed amount begins to phase out at $68,000 for singles, ending at a maximum of $78,000. In addition, joint-filers decreases after $109,000, ending at $129,000.
Roth IRA Limits for 2022 Highlights
Like a traditional IRA, the maximum amount you can contribute for those under 50 is $6,000. Those 50 and older can contribute an extra $1,000 for a total of $7,000 as catch-up contributions. The amount you can contribute to a Roth IRA is dependent on your income. In 2022, to be eligible to contribute the maximum amount, your income has to be less than $129,000 if you're single, phasing out above this number and stopping at $144,000. For married couples filing jointly, income must be less than $204,000. Above this income, it begins to decrease, stopping at $214,000.
Traditional IRA Limits for 2022 Highlights
The following is from the IRS website and highlights the income phase-out ranges for 2022:
- $68,000 to $78,000 - Taxpayers who are single and covered by a retirement plan at their workplace.
- $109,000 to $129,000 - Married couples filing jointly. Typically applicable to spouses contributing to the IRA that have coverage from their employer's retirement plan.
- $204,000 to $214,000 - A taxpayer not covered by a retirement plan at their workplace married to someone who's covered.
- $0 to $10,000 – Married filing a separate return. Typically applicable to taxpayers with coverage from a retirement plan from their employer.
Types of IRAs
- Roth IRA - Roth IRA contributions aren't tax-deductible; however, qualified distributions are tax-free. Like a traditional IRA, you can contribute to your account with after-tax dollars, and your investments are tax-free on their gains or whenever you withdraw funds.
- SEP-IRA - People like small-business owners, freelancers, and independent contractors typically use self-employed IRAs. The tax rules for SEP-IRAs are the same as traditional IRAs, except that contribution limits are set to 25% of income or $61,000, whichever is less.
- SIMPLE IRA - Self-employed people frequently use SIMPLE IRAs. However, unlike the SEP-IRA, business owners who set up SIMPLE IRAs for their employees must make contributions. In contrast, employers cannot make contributions under a SEP-IRA.