What You Should Know About Contributing to an IRA at Every Age

A traditional IRA offers a great way to shield income from taxation while boosting your retirement accounts. Meanwhile, a Roth IRA can let you pay tomorrow's taxes today. But how can workers who are eligible to contribute to either type of account decide where to allocate their retirement funds? Learn more about contributing to an IRA at every age and stage of your career.

IRA Contribution and Deductibility Limits

All workers who have any earned income are eligible to contribute to a traditional IRA (at least up to the total amount of their earned income for the year).¹ For many taxpayers, the ability to deduct IRA contributions can mean the difference between taxes owed and a tax refund.

However, this IRA contribution isn't tax-deductible for everyone. If you're covered by a retirement plan at work and your household income exceeds the following levels in 2022, your deduction may be limited or eliminated:

• For single or head of household taxpayers, a modified adjusted gross income (MAGI) of $68,000 to $78,000 will limit the IRA deduction, while a MAGI of more than $78,000 will eliminate it completely;
• For taxpayers who are married filing jointly, a MAGI of $109,000 to $129,000 will limit the IRA deduction, while a MAGI of more than $129,000 will eliminate it completely; and
• For taxpayers who are married filing separately, the IRA deduction is eliminated when the taxpayer's MAGI exceeds $10,000.

Another retirement savings vehicle is the Roth IRA. This IRA does not permit deductible contributions but instead allows for tax-free growth—that is, after turning 59.5, the account holder can withdraw any amount from the Roth without paying a dime in tax. For 2022, Roth accounts are subject to the following limits:²

• Taxpayers who are married filing jointly can contribute up to the maximum to a Roth IRA ($6,000 in 2022, or $7,000 for those age 50 and over) if their MAGI is below $204,000.
• Single taxpayers with a MAGI of less than $129,000 can also contribute up to the maximum to a Roth IRA.

Taxpayers who are not able to deduct their contributions to a traditional IRA but who are still below the Roth IRA income limits may instead arrange a "backdoor" Roth IRA contribution. By making a non-deductible contribution to one's traditional IRA, then immediately converting the contribution by transferring it to a Roth account, the worker can enjoy tax-free growth.

How Your IRA Strategy Can Shift Over Time

There's absolutely no one-size-fits-all strategy when it comes to IRA contributions. Despite this, there are a few rules of thumb workers may want to keep in mind when evaluating their investment goals or deciding whether to contribute to a traditional IRA, a Roth IRA, or both.

Low Effective Tax Rates Can Make a Roth a No-Brainer

Because a Roth IRA can offer decades of tax-free growth, it can make sense to contribute to a Roth IRA instead of a traditional one if your effective tax rate is currently very low and you're expecting to pay a higher tax rate in retirement. People who are just starting out in the workforce may opt for a Roth instead of a traditional IRA to take advantage of the low effective tax rates they're paying.

Deductible IRA Contributions Can Offer Many Benefits

High earners or those who have spent decades advancing in their careers may gain more benefit from a deductible IRA contribution than a Roth. By lowering one's adjusted gross income (AGI), these contributions can significantly reduce the total tax paid. And because many high earners or long-term workers expect to be in a lower income bracket in retirement, it can make sense to avoid taxes now and pay them at a lower rate in the future.

By continuing to re-evaluate your investment strategies as your income and career path change, you'll be well-positioned to take advantage of any policy changes that could impact the way your retirement accounts are taxed.