December is a hectic time of year. Between buying the right gifts, making holiday party appearances, and visiting with family, you’d be forgiven if your top concern isn’t maximizing your IRA contributions.

Nonetheless, end-of-year IRA contributions are something you should be thinking about. Especially considering recent reporting by the Wall Street Journal that Americans should begin planning for substantially lower income in their later years.

Luckily, you can still make contributions to your IRA for the 2021 tax year up until Tax Day (Monday, April 18, 2022). To help you maximize your investments, we’ll be covering:

  • IRA contribution limits for 2021 and 2022
  • Roth IRA contribution income limits
  • The 2021 IRA contribution deadline
  • How to contribute to your IRA after the end of the year
  • What to do if you contribute too much to your IRA

Roth and Traditional IRA Contribution Limits

Though the way they’re funded differs-traditional IRA contributions are made with pre-tax income whereas Roth IRA contributions are made using after-tax income-the contribution limits are the same for traditional and Roth IRAs.

For the 2021 and 2022 tax years, the IRS allows you to contribute up to $6,000 a year to a traditional or Roth IRA-$7,000 if you’re older than 50.

What Is the IRA Contribution Deadline for 2021?
Though the calendar year ends December 31, unlike with a 401(k), you may contribute to an IRA for the previous tax year up until Tax Day. Just be aware that between New Years’ Day and Tax Day, many IRA providers require you to select which tax year you want your contributions toward. Once you’ve made your selection, you may not be able to change it.

Keep in mind that the IRA contribution limit is the total amount you can contribute to all of your IRAs in a given tax year. The contribution limit is not per account. If you exceed the limit, you’ll pay a tax penalty until the excess contribution is removed.

So, let’s say you have two IRAs and are 27 years old. In this example, if you contributed $4,000 to one of your IRAs for the 2021 tax year, you may only contribute $2,000 to the second IRA for the same tax year.

However, IRA and 401(k) contribution limits are subject to different contribution limits, meaning you can contribute the maximum amount to a 401(k) or 403(b) while in the same year contributing the maximum to your IRA or IRAs. It’s also important to note that 401(k) and IRA rollovers don’t count toward IRA contribution limits.

Roth IRA Contribution Income Limits

Roth IRAs are popular for a reason: Qualifying distributions are completely tax-free. (For a distribution to be qualified, you must have had your Roth IRA open for at least five years and be 59 and a half years old.)

Because they’re not taxed at withdrawal, Congress put contribution income limits on Roth IRAs to prevent people over a certain modified adjusted gross income (MAGI) from taking advantage of an investment vehicle intended to incentivize the middle class to invest more for the future.

What Is Modified Adjusted Gross Income (MAGI)?
MAGI is your gross income-which includes wages, as well as business income, capital gains, dividends, and retirement distributions-minus certain deductions. Some of those deductions include alimony payments, contributions to retirement accounts, and student loan interest, as well as educator expenses (career specific).

So with that in mind, let’s take a look at the income limits for Roth IRA contributions in 2021 and 2022.

Roth IRA Income Contribution Restrictions

Filing Status Eligibility 2021 Tax Year MAGI 2022 Tax Year MAGI
Single, head of household, or married but filing separately Full Less than $125,000 Less than $129,000
Partial Between $125,000-$139,999.99 Between $129,000-$143,999.99
None $140,000 or more $144,000 or more
Married filing jointly or a qualified widow(er) Full Less than $198,000 Less than $204,000
Partial Between $198,000-$207,999.99 Between $204,000-$213,999.99
None $208,00 or more $214,000 or more

That does not, however, mean that a person earning above the maximum MAGI has no way of funding a Roth IRA. A Roth IRA can still be funded via a rollover from another Roth IRA or 401(k) account, or by converting from a traditional IRA or 401(k). (To learn about the pros and cons of converting funds into an IRA, read our blog post, What Is a Backdoor Roth IRA?)

IRA Contribution Age Limits

Anyone with an income can contribute to a traditional or Roth IRA. That said, IRA account holders are allowed to contribute up to the lesser of $6,000 ($7,000 if over 50 years old) or their taxable income for the year of contribution. (Generally, this doesn’t include passive income.)

Say, for example, you are a college student and working very limited hours but want to open a Roth IRA-a potentially very smart decision. If you earned just $2,000 in a year. You can then only contribute up to $2,000 to your Roth IRA for that year.

Still, you shouldn’t discount that “small” contribution. By starting earlier than most people, you’ll have more time to benefit from the power of compound interest over the long term.

What If You Contributed Too Much to Your IRA?

There’s one thing we still need to discuss… what happens if you contribute more than allowed for a given tax year or select the wrong tax year.

Keeping track of how much you contribute to your IRAs in a given year is ultimately up to you. In the event you exceeded the limit, the IRS will charge you a 6% penalty on the overage.

So, let’s say you over-contributed $100, you would then be required to pay a $6 penalty for each year the contribution remains in your account. If this happens, contact your IRA custodian to determine how to remove any excess contributions from your account. You might also consult with a trusted financial or tax advisor.

Likewise, if you selected the wrong contribution year, you’ll likely need to reach out to your custodian to have them amend the tax year.

There’s Still Time to Contribute to Your IRA for 2021

The year may be over, but you still have until April 18, 2022, to contribute to your IRA for the 2021 tax year. And that could be a smart investment strategy. Particularly if you’re nearing the Roth IRA income limit and want to maximize your contributions over the remaining years you anticipate eligibility.

Not only that, but you can use your IRA to diversify your portfolio beyond the public markets. Want to invest your IRA in non-traditional assets, such as cryptocurrency, real estate, private equity, or startups? Open an Alto IRA or Alto CryptoIRA® before the 2021 IRA contribution deadline and discover the many ways Alto enables you to diversify your portfolio.

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