Planning for your financial future? Individual Retirement Accounts (IRAs) are a great way to save for retirement, but understanding contribution rules can be tricky. Should you choose a Traditional IRA or a Roth IRA? This guide simplifies the key rules for both, helping you make the right choice for your retirement goals. Secure your golden years with confidence—start planning today!

What Is an IRA?

An Individual Retirement Account (IRA) is a savings tool designed to help individuals put away money for retirement while receiving tax benefits. There are two main types of IRAs:

• Traditional IRA: Contributions are often tax-deductible, meaning you might reduce your taxable income for the year you contribute. However, when you withdraw money in retirement, you'll pay income taxes on it.
• Roth IRA: Contributions are made using after-tax dollars, so there’s no upfront tax break. However, qualified withdrawals during retirement are entirely tax-free.

While both options are fantastic tools for retirement savings, their contribution rules differ slightly. Knowing these differences is critical for choosing the right strategy for your needs.

Traditional IRA Contribution Rules

Contribution Limits

For 2025, the IRS sets the following contribution limits for Traditional IRAs:

• $6,500 per year if you're under age 50.
• $7,500 per year if you're 50 or older (thanks to a $1,000 "catch-up" contribution).

Remember, these limits apply across all IRA accounts combined. For example, if you own both a Traditional IRA and a Roth IRA, your total contributions to both accounts cannot exceed $6,500 (or $7,500 if you’re 50+).

Income Limits

There are no income limits for contributing to a Traditional IRA. Regardless of how much you earn, you can contribute to this account.

However, the tax-deductibility of your contributions depends on your Modified Adjusted Gross Income (MAGI) and whether you or your spouse participates in a workplace retirement plan.

• If neither you nor your spouse has access to a workplace retirement plan, your contributions are fully deductible no matter your income.
• If you or your spouse is covered by a workplace retirement plan, deductible contributions phase out at higher income levels.

For example, in 2024, single filers with a MAGI under $73,000 can deduct the full contribution amount. Deductions phase out completely for single filers with a MAGI of $83,000 or more (for those covered by a workplace plan).

Age Restrictions

Before 2020, individuals were prohibited from contributing to a Traditional IRA once they reached age 70½. Thankfully, the SECURE Act removed this age restriction, allowing contributions at any age, as long as you have earned income.

Roth IRA Contribution Rules

Contribution Limits

Roth IRA contribution limits are the same as Traditional IRAs:

• $6,500 per year if you’re under 50.
• $7,500 per year if you’re 50 or older.

Income Limits

Roth IRAs come with income restrictions that limit who can contribute directly. Your eligibility to contribute begins to phase out once your income reaches certain levels, depending on your filing status and Modified Adjusted Gross Income (MAGI).

For 2025:

• Single Filers: Contributions phase out between $138,000 and $153,000.
• Married Filing Jointly: Contributions phase out between $218,000 and $228,000.

If your income exceeds these limits, you won’t be able to contribute directly to a Roth IRA. However, there’s a loophole known as the "backdoor Roth IRA" strategy, where you can contribute to a Traditional IRA and then convert it to a Roth IRA.

Tax Benefits

Your contributions to a Roth IRA are made with after-tax dollars (meaning they aren’t deductible). However, withdrawals are tax-free as long as you meet the following conditions:

• You’ve held the account for at least five years.
• You’re age 59½ or older, or the withdrawal qualifies for an exception like a first-time home purchase.

The major appeal of Roth IRAs is the ability to enjoy tax-free income in retirement, making them a great choice for individuals who expect to be in a higher tax bracket later in life.

Differences Between Traditional and Roth IRAs

If you’re debating between a Traditional IRA and a Roth IRA, here are the key factors to consider.

Tax Treatment

• Traditional IRA offers tax breaks upfront, as contributions may be tax-deductible. However, withdrawals are taxed as ordinary income.
• Roth IRA provides tax benefits later, with tax-free withdrawals in retirement.

Ask yourself this question to guide your decision: Do I benefit more from a tax break now or in the future?

Income Restrictions

Roth IRAs impose income limits that restrict who can directly contribute. Traditional IRAs, however, allow contributions regardless of income.

Required Minimum Distributions

With Traditional IRAs, you must begin taking required minimum distributions (RMDs) at age 73, as outlined in the SECURE Act 2.0. In contrast, Roth IRAs don’t require RMDs during the account owner’s lifetime, offering greater flexibility for retirement planning.

Early Withdrawal Rules

Withdrawing from a Traditional IRA before age 59½ triggers a 10% penalty and taxes, with few exceptions. Roth IRAs allow you to withdraw your contributions (but not earnings) anytime without taxes or penalties.

Tips for Maximizing Your IRA Contributions

To make the most of your retirement savings, follow these simple strategies:

1. Contribute Early: Starting earlier gives your account more time to grow through compounding interest.
2. Maximize Contributions: Aim to contribute the maximum limit for your age group if your budget allows.
3. Don’t Forget Catch-Up Contributions: Once you turn 50, take advantage of the extra $1,000 contribution limit.
4. Automate Savings: Set up automatic contributions to ensure you’re consistently funding your account.
5. Use Roth or Traditional Based on Taxes: If your income is high now and you expect it to lower in retirement, consider a Traditional IRA. If your income is lower now, opt for Roth.

Conclusion

Understanding the rules for Traditional and Roth IRA contributions is the first step toward building a solid foundation for your retirement savings. Each option offers distinct features, making it critical to evaluate your unique financial situation and retirement goals. If you’re ready to take control of your financial future, don’t wait. Open an IRA account today to begin your retirement savings journey!