For employees, the benefit is obvious – it allows them to save more.
What is a contribution?
A contribution is the money deposited into a traditional or a Roth Individual Retirement Arrangement (IRA) over the course of a year. A contribution can be tax deductible, depending the type of IRA it is.
Whether you have a traditional or Roth IRA, the IRS limits the amount you contribute to the account. As of 2017, the maximum annual contribution is $5,500 if you are under the age of 50 and $6,500 otherwise.
In the case of a traditional IRA, you are allowed to make contributions until you are 70 1/2 years old. You can make contributions to a Roth IRA throughout your life.
Contributions to an IRA must come from earned, taxable income. There is an exception for married couples. If a spouse doesn’t earn income, he or she can still contribute to an IRA as long as his or her partner had earned income during the year.
IRA contributions can be tax deductible. Whether a contribution is deductible depends on the type of IRA and your retirement options. Contributions to a Roth IRA aren’t tax deductible. When it’s time to withdraw the money from the account, you don’t pay taxes on the original contributed amount or on any earnings.
Although contributions to a traditional IRA are usually deductible, meaning you pay tax on them later, there are some exceptions. You can’t deduct the amount of your traditional IRA contribution if you have a retirement plan at work and earn more than $72,000 as a single or $119,000 if married and filing a joint return.
The annual IRA contribution limit is for all accounts combined. You can’t contribute $5,500 to a traditional IRA and an additional $5,500 to a separate Roth IRA.
You can choose to contribute to your IRA throughout the year or make a single lump-sum contribution. Say you decide to deposit $5,500 into a traditional IRA at the beginning of the year. That’s your contribution for the year.
You also can make smaller contributions over the course of the year. Say you decide to contribute $458 every month. By the end of the year, you will have contributed almost the entire allowed amount to your account.
Should you contribute to a traditional or to a Roth IRA? Use our Roth vs. traditional IRA calculator to see which option saves the most money.