Individual retirement accounts incentivize retirement savings with retirement benefits. With traditional IRAs, contributions are tax-deductible and the money grows tax-free until you take it out at retirement. With Roth IRAs, contributions won't reduce your taxable income, but the money grows tax-free in the account and qualified distributions come out tax-free. The contribution limits apply across both traditional IRA and Roth IRA contributions, so each dollar you contribute to your traditional IRA reduces the amount you can put in your Roth IRA.
Annual IRA Contribution Limits
The annual contribution limits for IRAs vary from year to year with inflation. As of 2018, you're allowed to contribute up to a maximum of $5,500 to an IRA. If you're age 50 or older, you can make an additional "catch-up" contribution of $1,000 per year, for a total of $6,500.
Taxable Compensation Requirement
To be eligible to contribute to an IRA, you must have taxable compensation. The IRS defines taxable compensation as money you earn from working, including wages, salaries, commissions, self-employment income and alimony or separate maintenance. It does not include investment income, interest, pensions, or Social Security benefits. If your taxable compensation for the year is less than the standard contribution limit, your IRA contributions for the year cannot exceed your taxable compensation. For example, if you only have $3,000 of taxable compensation, you're limited to putting $3,000 in your IRA for the year.
Spousal IRA Contributions
If you are married and file a joint return, you can count your spouse's taxable compensation, reduced by your spouse's IRA contribution, when figuring your IRA contribution limit. For example, say you are a stay-at-home parent with no taxable compensation and your spouse works. If your spouse's compensation is $60,000 and your spouse contributes $5,000 to an IRA, that leaves $55,000 in taxable compensation that you can use to qualify to contribute to an IRA as long as you file a joint return.
Roth IRA Income Limits
If your income is too high, you aren't eligible to contribute to a Roth IRA. The income limits vary depending on your filing status. For example, in 2018, if you're married filing jointly, your Roth IRA contribution limit starts to decrease when your modified adjusted gross income exceeds $189,000 and hits $0 when your MAGI hits $199,000. For single filers, your contribution limit starts to fall at $120,000 and disappears completely at $135,000. If you're married filing separately, you can't make a full contribution, and your contribution limit hits $0 as your MAGI exceeds $10,000. These income limits are adjusted each year for inflation.