Must-Ask Questions: IRA Contributions

June 7, 2023
What's the maximum IRA contribution? Are IRA contributions tax deductible? What if you contribute too much? Get answers to these questions and others before you open an account.

An employer-sponsored retirement plan isn't your only option to save for your future. Indeed, if your employer offers a plan—and a match—you'll want to contribute at least enough to earn the full amount. The next best place to save—especially if you don't have a retirement plan at work—is an individual retirement account (IRA). 

"The ability to defer taxes, invest for potential growth, and—with a Roth IRA—make tax-free withdrawals in retirement are some of the reasons to consider an IRA," says Rob Williams, managing director of financial planning, retirement income, and wealth management at the Schwab Center for Financial Research. "But before you open one, it's important to understand the rules and how each type of IRA differs," says Rob. 

Here are eight must-ask questions about IRA contributions—who, how much, pre-tax versus after-tax, and more. 

1. Who can contribute to an IRA?

Anyone with earned income (salary, wages, or tips from a job or self-employment) can contribute to a traditional IRA. To contribute to a Roth IRA, your income must fall below a certain limit, but there are no age restrictions.

2. How much can I contribute to an IRA each year?

For 2023, the annual maximum IRA contribution is $6,500 if you’re under 50, or $7,500 (including the $1,000 catch-up contribution)1 if you're 50 or older. Keep in mind, your annual IRA contributions can't exceed your income for the year. And if your income goes over the IRS threshold, your contributions to a Roth IRA will be capped or phased out. You can contribute to multiple IRAs in the same year (for example, a traditional IRA and a Roth IRA), but your combined contributions can't exceed the annual maximum.

3. What's the difference between pre-tax and after-tax IRA contributions?

Pre-tax IRA contributions are generally tax-deductible and allow you to delay taxes until you withdraw money from your account. After-tax contributions are made with income you've already paid taxes on. There's no up-front tax break, but you may be able to withdraw money tax-free if you meet certain requirements. You can contribute pre-tax or after-tax dollars to a traditional IRA,2 but Roth IRA contributions can only be made with after-tax dollars.  

4. Are my contributions tax deductible?

Contributions to traditional IRAs are generally tax-deductible. But if you or your spouse have a 401(k) or other employer retirement plan in addition to a traditional IRA, you'll also need to meet certain income limits to get the deduction. Contributions to Roth IRAs aren't tax-deductible, since they're made with after-tax dollars.

5. Can I contribute to an IRA that I inherited?

You can treat an IRA that you inherit from your spouse as your own and make contributions. But if you inherit it from someone other than your spouse, you can't make contributions. Certain rules also apply when it comes to taking money out, including when you're required to start withdrawing funds and how long you have to take all of the money out of the account. The rules can be complicated, so consider working with a tax advisor to avoid costly mistakes.

6. Can I contribute to an IRA once I've retired?

In most cases, you must have earned income to contribute to an IRA. So if you're completely retired, you won't be eligible. One exception is a spousal IRA, which allows a non-working spouse to contribute to an IRA as long as the other spouse is still working and they file a joint return.

7. What happens if I contribute too much to my IRA?

Contributing more than the annual IRA contribution limits allow can trigger a 6% penalty. In most cases, you can remove the extra funds, but you may still owe a penalty. If you overcontribute to a traditional IRA, you may also owe additional taxes on your withdrawals. For the best outcome, consider talking to a tax advisor about your specific situation.

8. How will my contributions be invested in my IRA account?

Most IRAs offer a wide selection of investment choices, such as individual stocks, bonds, mutual funds, ETFs, and certificates of deposit (CDs). If you're not comfortable building your own diversified portfolio based on your goals and risk tolerance, consider an IRA that offers portfolio guidance or automated investing.

Under SECURE Act 2.0, catch-up contributions will be indexed to inflation beginning in 2024.

If you make after-tax contributions to a traditional IRA, you must also file Form 8606 (Nondeductible IRAs) with the IRS.  

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Traditional IRA withdrawals are subject to ordinary income tax and prior to age 59½ may be subject to a 10% federal tax penalty.

If you take a distribution of Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and a 10% federal tax penalty.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for their own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

The Schwab Center for Financial Research is a division of Charles Schwab & Company, Inc.