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Retirement Account Tax Saving Series II – How to be Eligible to Contribute to an IRA

Retirement Account Tax Saving Series II – How to be Eligible to Contribute to an IRA

April 20, 2022
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One of the most frequently asked questions by everyone was “Can I contribute to an IRA?” To help answer this question, we will be referencing numbers from the year 2022 throughout the article.

 

Contribution

Traditional 401K and Roth 401K

 

1. Contribution Cap of $20,500

Whichever 401K plan is chosen -- Traditional 401K or Roth 401K – a person can only contribute up to $20,500 in 2022 altogether. If an individual reaches over 50 years old, they can contribute an extra $6,500 each year.

 

2. A Spouse’s Ineffectiveness on an Individual’s 401K

The 401K contribution limit is not affected by a spouse’s income. An individual can contribute up to $20,500 despite their spouse’s occupation or salary level. (Regarding to this point, the IRA contribution limit we are going to talk about is different as it will be affected by the spouse's income.)

 

3. Contribution at Any Age

An individual can contribute to their 401K for as much as they wish regardless of age (within the contribution limit). However, the premise is that if the employer offers a 401k program, the individual has a job with income, and he or she continues to work.

 

Contribution

Traditional IRA and Roth IRA

 

1. An IRA Contribution Limit

Usually, for both Traditional and Roth IRAs, a person can contribute up to $6,000 yearly. Also, when one reaches over 50 years old, they can contribute an additional $1,000, so the total contribution limit reaches $7,000. However, the eligibility of contributing to a Roth IRA depends on if the individual’s income exceeds certain levels. The eligibility of contributing to a Traditional IRA is also limited on whether a retirement plan covers the individual or their spouse at work, and if their income exceeds certain levels. To display the decision procedures and the numbers in a straight-forward way, several Decision Trees were created below for a better understanding purpose. The most common tax filing statuses are listed in those decision trees: Single and Married Filing Jointly (MFJ).

 

2. Effectiveness of a Spouse’s Income on an Individual’s Traditional IRA

The ability for an individual to get into a Traditional IRA is influenced by the income of their spouse. Moreover, if the spouse’s company offers an Employer Retirement Plan (ERP), it will affect your eligibility in contributing to a Traditional IRA.

*Please refer to the Decision Trees below for more details. *

 

3. No Age Limit to Contribute to a Traditional IRA Account

Prior to 2020, an individual cannot contribute to a Traditional IRA if he or she is over 70 ½ years old. From 2020 and later, the age cap was disbanded for a Traditional IRA. This change puts Traditional IRAs on par with Roth IRAs, which never had an age cut-off. Since 2020, a person can contribute to a Traditional IRA regardless of age.

 

4. IRA’s Contribution Deadline

A person can contribute to an IRA during the calendar year and up to the Tax Day of the following calendar year. For example, taxpayers can contribute during 2021 and have until the tax deadline of the following year (April 18, 2022) to contribute to an IRA. To do so, one must open an account, and have funded it by this date. When you contribute to your IRAs between 1/1/2022 and 4/18/2022 (tax due date), the contribution amount can be counted as the 2021 or 2022 quota.

 

Below are the 3 decision trees that will help an individual understand whether they are eligible to save in a Traditional IRA and Roth IRA.


Glossary in the Decision Trees:

MFJ – Married Filing Jointly

MAGI – Modified Adjusted Gross Income

ERP – Employer Retirement Plan

  • The most common EPR is the 401K offered by the company. How do you know if the company has provided this? Quite simple, take out your W-2 and find the 13th box. If you're covered by an ERP, the 13th grid of "Retirement Plan" box should be checked.

 

Traditional IRA with ERP

 



Traditional IRA without ERP


Roth IRA

 


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.