Key Takeaways
- For 2022, the IRS raised income limits to qualify for a Roth IRA and for making deductible contributions to a traditional IRA.
- Contribution limits for traditional and Roth IRAs, however, are not going up this year.
- The most you can contribute annually to an IRA in 2022 is $6,000, plus an extra $1,000 if you are age 50 or older.
- Under new legislation heading to the Senate after being passed by the House in March 2022, the Securing a Strong Retirement Act of 2022 (known as SECURE Act 2.0) would continue to tweak IRA rules and retirement savings plans, annually indexing the catch-up contribution limit to inflation, beginning in 2023.
- Note that many financial institutions – including Howland Capital – call “traditional” IRAs “rollover IRAs,” but they are essentially the same. The only difference is that rollover IRAs contain retirement money that has been “rolled over” or transferred from another institution. For this article, we will use the term traditional IRA.
You may feel like you just filed your 2021 federal income tax return, but it’s never too early to start planning for next year’s return. When it comes to saving for retirement, there is a mixed bag of updated IRA rules to brush up on for 2022.
What has changed and what stays the same? Here is a quick look at everything you need to know about traditional IRA and Roth IRA eligibility criteria, contribution limits, tax breaks, and withdrawal rules for 2022.
IRA Eligibility & Income Limits
Anyone of any age is eligible to contribute to a traditional or Roth IRA if they have taxable income from a job or self-employment. As referenced below, non-working spouses can also contribute to both. The amount of the contribution to any IRA cannot exceed your earned income for the year. For Roth IRAs, the amount of contributions you are allowed to make is reduced or eliminated if your modified adjusted gross income (MAGI)* goes beyond certain thresholds.
Traditional IRA Income Limits
There are no maximum income limits for traditional IRAs.
Roth IRA Income Limits
Unlike traditional IRAs, how much you earn does make a difference to how much you can contribute to a Roth IRA. The income ceilings on Roth IRA contributions are higher for 2022 than for 2021.
Full contributions can be made by single taxpayers with MAGI under $129,000 and joint filers with income under $204,000. Partial contributions can be made thereafter, and they then phase out once MAGI reaches $144,000 for singles and $214,000 for joint filers.
Traditional and Roth IRA Contribution Limits
Contribution limits in 2022 for traditional and Roth IRAs remain unchanged from 2021. The most you can contribute annually to either type of IRA this year is $6,000, plus an extra catch-up contribution of $1,000 if you are age 50 or older.
Can you contribute simultaneously to a traditional IRA and a Roth IRA? You can, as long as the total contributed across both types of accounts does not exceed that annual contribution limit.
Additionally, under an IRS rule for married couples, a working spouse can contribute to an IRA for a non-working spouse. This spousal IRA can be either a traditional or Roth, and the same contribution limits apply.
IRA Contribution Tax Breaks
You may be able to claim a deduction on your tax return for the amount you contribute to a traditional IRA, but not a Roth. The amount of the deduction depends on your filing status and income.
Traditional IRA Tax Breaks
Single filers with MAGI of less than $68,000 and married couples filing jointly with income under $109,000 can deduct their full contributions to a traditional IRA for the 2022 tax year. Deductions are then reduced and phased out completely once annual income reaches $78,000 for singles and $129,000 for joint filers.
With traditional IRAs, your deduction may be limited if you or your spouse are covered by a workplace retirement plan. For instance, what if one of you has a retirement plan at work but the other doesn’t? The non-covered spouse’s ability to deduct traditional IRA contributions is phased out as MAGI on a joint return rises from $204,000 to $214,000.
But you can always deduct your full contribution if you and your spouse do not have a plan at work.
Roth IRA Tax Breaks
Unlike traditional IRA contributions, Roth IRA contributions are not tax-deductible — and you don’t report them on your tax return. Instead of an upfront tax advantage, Roths deliver their benefit later — when withdrawals in retirement are tax-free.
IRA Withdrawal Rules
While you can take money out of an IRA at any time, you will avoid paying penalties and taxes by not making withdrawals too early. Restrictions ease at age 59½ when you can generally withdraw from a Roth or traditional IRA penalty-free.
Traditional IRA Withdrawals
Any deductible contributions and growth from those contributions that you withdraw from a traditional IRA are taxable as ordinary income. If you are under age 59½ and take a withdrawal, you may have to pay a 10% penalty on top of taxes unless you qualify for one of several exceptions allowed by the IRS, such as a first-time home purchase, certain education expenses, or a portion of unreimbursed medical expenses.
In addition, you must start taking required minimum distributions (RMDs) by April 1 following the year you turn age 72 — and by Dec. 31 on subsequent years. RMD amounts are based on your life expectancy and the prior year-end balance of your retirement accounts.
Roth IRA Withdrawals
Contributions you make to a Roth IRA and growth from those contributions aren’t tax-deductible. That means that on or after the date you reach age 59½ — and as long as you have owned your Roth for at least five years — withdrawals are tax-free. Unlike traditional IRAs, Roth accounts don’t have RMDs.
Common, but Uncommon
Traditional IRAs and Roth IRAs share some common ground when it comes to IRA rules, and they are both designed to help you save for retirement. While just a few things have changed for 2022, a fundamental difference between traditional and Roth IRAs stays the same: A traditional IRA allows you to contribute money that can grow tax-deferred, while a Roth IRA holds after-tax money you can withdraw tax-free.
Looking ahead, as the SECURE Act 2.0 moves through the legislative process, we are continuing to follow its progress and will share important updates.
**Modified adjusted gross income is not a figure reported on your tax return but you can calculate it using the information on your return. If you are not sure what your MAGI is, please consult your tax professional.
