Roth IRA Contribution Limits for 2022

Roth IRA Contribution Limits for 2022

Roth IRA Contribution Limits for 2022
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For every working American, contributing to an individual retirement account (IRA) is an excellent way of saving for retirement. According to statistics he Investment Company Institute, in 2020 alone, about a third of American families used IRAs to boost their retirement savings, which translated to $10.8 trillion in assets.

Annual IRA contribution limits are based on factors such as your existing retirement plans, age, and income. As such, the limits aren’t fixed. If you’re looking to save for your retirement and want to maximize your investments, this article is for you. 

What is a Roth IRA?

A Roth IRA is an individual retirement account established as part of the Taxpayer Relief Act of 1997. This particular act was sponsored by former Delaware senator William Roth. A Roth IRA offers unique tax benefits, including tax-free investment growth and withdrawals upon retirement. 

Roth IRAs are similar to traditional IRAs, except that Roth IRAs are funded using after-tax income, while the contributions to traditional IRAs are taxed during withdrawal. Also, while contributions to Roth IRAs are tax-deductible, the withdrawals are tax-free, unlike in traditional IRAs. 

Roth IRAs can be established at regulated financial institutions such as commercial banks, credit unions, brokerage companies, and savings and loan associations. The Internal Revenue Service (IRS) establishes eligibility rules for Roth IRAs. 

Benefits of a Roth IRA

As recommended by the investment experts at MoneyWizard.co, establishing a sustainable retirement kitty should be every American’s top priority as soon as they begin to generate income. Dozens of great retirement plans, including the Roth IRA, are offered by trusted financial institutions in the US. Anyone earning income can contribute to a Roth IRA. This enables individuals to begin saving early and to enjoy bigger tax savings.

Other benefits of Roth IRAs include the following:

1. Tax benefits

The most obvious benefit of a Roth IRA is the tax advantage that your investment enjoys. Contributions made to Roth IRAs are taxed beforehand. Compounded gains are not taxed during withdrawal, as in traditional IRAs. Since you’ll be funding the account with after-tax dollars, your contributions and gains will not be subject to tax in the future, such as when you make withdrawals in retirement. 

Compared with traditional IRAs, it takes a little longer for the tax savings of Roth IRAs to pay off, which is why individuals are advised to begin saving earlier to achieve greater gains. If you anticipate paying a higher tax rate in the future, due either to inflation or other economic or political factors, a Roth IRA will be a brilliant way to realize tax savings. 

2. Flexible withdrawals

Roth IRAs provide hassle-free early withdrawals. Ideally, dipping into your retirement kitty during your prime earning years is not the best idea. During an emergency, however, your Roth IRA could be your only option. In this case, a Roth IRA gives you easy access to your funds, provided that certain conditions are met. When you’re 59½ years or older and have owned the account for at least five years, you can withdraw from your Roth IRA without paying any taxes or penalties. 

3. Friendly withdrawal guidelines

Unlike traditional IRA investors, owners of Roth IRAs are not subject to the required minimum distributions (RMDs) that force them to withdraw their savings regularly when they reach 72 or face a 50% penalty. Roth IRA account owners can leave their savings to accrue interest for as long as they wish, without risking fines from the IRS.

Who is eligible for a Roth IRA?

Almost everyone earning taxable income in the US can contribute to a Roth IRA. Earned income comes in two forms: money earned from employment, which includes salaries, wages, commission, tips, and bonuses, and income from self-employment, such as profits generated from a small business that you operate. An income limit caps high earners who are looking to take advantage of the tax benefit.  

Unearned income that you cannot contribute to the Roth IRA includes government benefits such as welfare, disability, and social security, as well as pensions, retirement benefits, child support, nontaxable alimony, capital gains, interest from savings accounts, stocks, dividends, and rental income.

Before the SECURE ACT of 2019, Roth IRA investors could not contribute to their accounts after the age of 70½. This law did away with the age limit. Now, individuals of all ages can contribute to the Roth IRA plan. Teenagers can open an account using their summer earnings, parents can open accounts for their children while saving for their own retirements, and individuals nearing retirement can also make contributions. 

What is the Roth IRA contribution limit in 2022?

The IRS restricts the amount that individuals can contribute to their Roth IRAs. Each year, the taxman determines the Roth IRA limit, a move meant to protect the average American worker. The limit is also used to restrict high earners from evading their tax liability by finding a loophole in the tax benefit offered by the plan.

You can contribute to the Roth IRA plan if your annual income is under the specified amount. To contribute in 2022, your modified adjusted gross income (MAGI) must be under $140,000. If you are married and filing jointly with your spouse, your combined MAGI must be under $208,000.

The Roth IRA limits in 2022 are $6,000 for individuals under 50 and $7,000 for those over 50. Your income determines how much you can contribute to your Roth IRA kitty. For example, single tax filers whose MAGIs are under $125,000 can max out their contribution, but those whose MAGIs are over $125,000 but under $140,000 can invest a smaller amount. 

How is the contribution limit determined?

The Roth IRA contribution limit is based on your modified adjusted gross income (MAGI) and tax filing status. The idea is to prevent high earners from taking excessive advantage of this plan, which is meant to benefit low and average earners. 

MAGI is basically your adjusted gross income (AGI) with certain deductions added back into it. The IRS uses MAGI to determine if you qualify for benefits such as Roth IRAs, Medicaid, and subsidized health insurance plans.

As mentioned previously, to be eligible to contribute to a Roth IRA in 2022, a single filer must have a MAGI of under $140,000, and a couple must have a combined MAGI of under $208,000. The IRS can tell from your filing status whether you are a high earner and disqualify you from contributing to a Roth IRA.  

What happens if I contribute too much to my Roth IRA?

Each year, the IRS announces Roth IRA contribution limits based on individual MAGI and tax filing status. While it is recommended to max out your savings each year, it is crucial to avoid making excess contributions because the IRS considers the excess “ineligible” and imposes a penalty on it. 

For example, in 2022, the limit is $6,000 for individuals under 50 and $7,000 for those over 50. If you invest $7,000 when your limit is $6,000, the extra $1,000 is considered an ineligible contribution and incurs a 6% penalty each year until you correct the mistake. 

Luckily, there are a couple of ways to correct excess contributions and avoid the penalty altogether. The first alternative is to withdraw any excess contributions together with their earnings before the April tax filing deadline. 

However, if you already filed your tax return, you can withdraw the ineligible contributions and file an amended return before the October deadline. 

Alternatively, you can incur the penalty for the year in which you made the ineligible contribution and dedicate the excess to the following year’s contributions. You can, as well, wait until December 31 of the following year to withdraw the excess. That way, you will incur penalties for two years and correct the issue moving forward.

Understand that because contribution limits and income fluctuate, it is possible to be eligible to make a contribution this year and miss out the following year. To avoid incurring fines for excess contributions, pay attention to IRS contribution limits and keep tabs on your income. 

What if I can’t contribute the maximum amount?

While the Roth IRA has a contribution limit, the IRS guidelines do not stipulate a minimum contribution requirement. Some providers, however, require a minimum contribution to begin investing your funds. 

Maxing out your contribution allows you to enjoy maximal tax savings from your investment. There’s absolutely no problem contributing less than the limit, but it pays off quickly to match the limit whenever you can.  

Conclusion and Recommendations

The Roth IRA is a remarkable retirement savings plan, especially when you anticipate paying a higher tax rate in the future. As long as you have earned income, it is easy to establish a Roth IRA and begin funding it straightaway, at any age.

Withdrawal is easy too, and unlike traditional IRAs, your savings won’t be subject to the required minimum distributions (RMDs) that force investors to make withdrawals regularly or have a penalty imposed.

Follow IRS guidelines on contribution limits, income, and withdrawals to avoid fines that can eat into your savings. New limits are announced each year, and you must familiarize yourself with the new contribution limits and regulations. You can consult the IRS or the experts at MoneyWizard.co if you have any questions concerning this popular retirement plan.

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