This post is a follow-up to my previous post in which I discussed some of the basics concerning Individual Retirement Accounts (“IRAs”). It can be found here if you haven’t read that post yet. In this “Part 2” post, I’ll discuss some of the limitations and tax implications of contributions to and distributions from IRAs.
As noted in my prior post, the tax advantages of an IRA depend on whether the IRA is classified as a “Traditional” or “Roth” IRA. I’ll discuss each of those separately here.
General Limitations
As a general matter, taxpayers can only contribute a certain amount to IRAs each year. [1] This amount is adjusted on an annual basis to account for a “cost of living adjustment,” which is, in turn, computed based on annual core inflation. [2] For 2023, this amount was $6,500 [3], but was increased to $7,000 for 2024 [4].
An additional $1,000 is added to this annual limitation if you’re over the age of 50. [5]
Traditional IRAs
- Contributions to a Traditional IRA
Contributions to a traditional IRA are typically deductible. [6]. However, there are certain limitations that apply to individuals participating in certain listed pension plans. [7]
- Distributions from a Traditional IRA
Distributions from a traditional IRA are typically included in taxable income. [8] There are several exceptions to this, perhaps most notably the exception for “rollover contributions.” In short, amounts that are distributed but are rolled into another qualifying IRA or eligible retirement plan are not includible in taxable income. [9]
Roth IRAs
- Contributions to a Roth IRA
Contrary to a traditional IRA, contributions to a Roth IRA are not deductible. [10] Additionally, there are more applicable limitations that determine whether and to what extent a taxpayer can contribute to a Roth IRA. [11] These limitations depend, in large part, on the taxpayer’s “modified adjusted gross income” and filing status. [12]
- Distributions from a Roth IRA
Also contrary to the traditional IRA, “qualified distributions” from a Roth IRA are not included in taxable income. [13] “Qualified distributions” include, among others, distributions that (i) occur on or after the date the taxpayer turns 59 ½ and (ii) are made to the taxpayer’s beneficiary or estate after his or her death. [14]
[1] I.R.C. § 408A(c)(2); I.R.C. §§ 4973(a), (b).
[2] I.R.C. § 219(b)(5)(C); I.R.C. § 1(f)(3).
[3] See https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits.
[4] See https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000.
[5] I.R.C. § 219(b)(5)(B).
[6] I.R.C. §§ 219(a), (e).
[7] I.R.C. § 219(g).
[8] I.R.C. § 408(d).
[9] I.R.C. § 408(d)(3).
[10] I.R.C. § 408A(c).
[11] I.R.C. § 408A(c)(3)(A).
[12] Id.
[13] I.R.C. § 408A(d)(1).
[14] I.R.C. § 408A(d)(2).
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