401(k) vs. IRA Contribution Limits

The Internal Revenue Service (IRS) limits the annual contributions individuals may make to their retirement plans, including Roth IRAs, traditional IRAs, and 401(k)s.

Types of Contributions

Each retirement plan allows for two different types of contributions, based on age. The first, known as a “regular contribution,” applies to individuals younger than 50. The second, known as a “catch-up contribution,” is an extra amount available to those 50 or older.

The latter is so named because such investors are closer to retirement age and have less time for their assets to grow. The IRS consequently permits larger contributions, in hopes that the investments will “catch up.”

Note: Individuals may make catch-up contributions when they're 49 if they'll turn 50 by the end of the year.

IRA Contribution Limits

For 2023, the maximum allowable contributions to Roth IRAs are $6,500 for those younger than 50 and $7,500 for those older. The limit increases to $7,000 in 2024, or $8,000 for those 50 and older.

Individuals must have earned income from wages and other sources in order to contribute to an IRA, and those earnings must match or exceed the amount of the contribution. For example, if you earned $4,000, that's the most you may contribute. Note: if a worker's income exceeds a certain threshold, they may not contribute to a Roth IRA at all (see below).

Traditional IRAs observe the same contribution limits as Roth IRAs. But unlike Roth IRAs, individuals may always contribute to traditional IRAs—regardless of their income levels.

Which Contributions Are Not Counted in the Limit?

While there are annual contribution limits to Roth IRAs, there are no such yearly caps to the following:

• Investments rolled over from one Roth IRA account to another.
• Funds converted from traditional IRAs to Roth IRAs.
• Funds rolled over from 401(k)s and other qualified retirement plans into IRAs.

Roth IRA Income Limits

Unlike traditional IRAs and 401(k)s, Roth IRAs impose income limits that determine how much one may contribute. And if your income exceeds a certain threshold, you may not contribute to a Roth IRA at all.

The following contribution limits must be observed in 2023 and 2024:

• Individuals may contribute the full amount if they're married filing jointly, and their modified adjusted gross income (MAGI) is less than $218,000 (rising to $230,000 for 2024).
• Individuals may contribute the full amount if they're single, and their modified adjusted gross income (MAGI) is less than $138,000 (or $146,000 in 2024).
• Married joint filers with annual MAGIs ranging from $218,000 to $228,000 may contribute a reduced amount (rising to a range of $230,000 to $240,000 for 2024).
• Single filers with MAGIs ranging between $138,000 to $153,000 may contribute a reduced amount (rising to a range of $146,000 to $161,000 for 2024).
• Married filers whose MAGIs exceed $228,000 may not contribute to Roth IRAs at all (rising to $240,000 for 2024).
• Single filers whose MAGIs exceed $153,000 may not contribute to Roth IRAs at all (rising to $161,000 for 2024).

The IRS has a worksheet to walk you through whether or not you can contribute.

Here’s a summary of the Roth IRA income limits for 2023 and 2024:

Traditional IRA Income Limits

Unlike Roth IRAs, traditional IRAs are funded with pre-tax dollars, so you can usually write off the contribution during the year you make it. But this is governed by several factors.

If you’re single and have no workplace plan, or if you’re married and neither you nor your spouse has one, you may fully deduct your IRA contribution—regardless of your income. On the other hand, if you don’t have an employer-sponsored plan, but your spouse has one, you may deduct the full amount if you’re married filing jointly and your MAGI is $218,000 or less (rising to $230,000 for 2023).

The numbers change if you have a workplace plan. For 2023, married couples filing jointly can take the full deduction if they make less than $116,000 (rising to $123,000 in 2024). If you collectively earn between $116,000 and $136,000, you can take a partial deduction (rising to $123,000 and $143,000 in 2024). And if you earn more than $136,000 (or $143,000 in 2024), you may not deduct anything.

In 2023, single filers can take a full deduction if they earn $73,000 or less ($77,000 in 2024). They can take a partial deduction if they earn more than $73,000 but less than $83,000 (a range of $77,000 to $87,000 in 2023), and they may deduct nothing if their income exceeds $83,000 (or $87,000 in 2024).

Here's a rundown of traditional IRA income limits for 2023 and 2024:

More Details on IRA Contributions

With Roth and traditional IRA contributions, limits are imposed per taxpayer, not per account. That means an individual may not contribute $6,500 to a Roth IRA and an additional $6,500 to a traditional IRA in 2023. Instead, one may contribute a total of $6,500 split across the different IRAs, say $4,000 to a Roth IRA, and the remaining $2,500 to a traditional IRA. In 2024, the total contribution rises to $7,000.

Married couples can also contribute the same amounts to a spousal IRA for a non-working spouse, as long as one spouse earns enough income to cover both contributions.

401(k) Contribution Limits

As with traditional IRAs, the eligibility to contribute to 401(k)s is not governed by income limits. Furthermore, investors may annually stash significantly more money in their 401(k)s. Case in point, for 2023, the 401(k) contribution limit is $22,500 for those under 50, and $30,000 for those older (rising to $23,000 and $30,500, respectively, in 2024).

While 401(k) contributions reduce your taxes, you don't actually claim a deduction when you file because those contributions come directly out of your paycheck, and are therefore made with pre-tax dollars. This lowers your taxable income for the year, saving you cash at tax time.

401(k) Match Limits

The biggest benefit of a 401(k) plan is the employer match, which is typically a percentage of your contribution, up to a certain amount of your salary. For example, your employer may match 50% of your contributions, up to 5% of your salary. So, if you earn $100,000 and contribute $10,000 to your 401(k), your employer would kick in an extra $2,500 = ($100,000 x 5% = $5,000 x 50%).

Although any match your employer provides doesn't count toward your annual contribution limit, the IRS does limit the total dollars annually invested into your 401(k). For 2023, the combined 401(k) contribution limits between yourself and the employer-matched funds are as follows:

• $66,000 if you're under 50 (rising to $69,000 in 2024)
• $73,500 if you're 50 or older (rising to $76,500 in 2024)
• 100% of your salary if it's less than the dollar limits

Ineligible (Excess) IRA Contributions

Those who invest more dollars into an IRA than they're entitled to will be penalized with a 6% excise tax on any excess contribution. This fine will be levied each year until the mistake is corrected. Most people who make ineligible IRA contributions do so inadvertently, often under the following scenarios:

• They earn more money and fall outside the income eligibility range.
• They forget that they contributed earlier that year.
• They contributed money that doesn’t qualify as earned income.
• They contributed more than their earned income for the year.

How to Fix Excess IRA Contributions

If you realize you’ve contributed too much money to a single IRA account, or a combination of accounts, there are several ways to reverse the excess contributions. But it's important to act fast because failure to meet deadlines can trigger stiff penalties.

If you discover your mistake after filing income taxes for the year, you can remove the excess contribution within six months. Alternatively, you can reduce the following year’s contribution by the excess amount. For example, if you errantly contributed $8,000 one year, you can reduce your contribution by $2,000 (the excess amount) the following year. But remember that carrying forward the excess this way subjects you to that 6% penalty until the excess is absorbed.

Excess 401(k) Contributions

Even though your employer deducts your contributions to a 401(k), it's still possible to over-invest if the following scenarios occur:

• You switch employers or retirement plans in the same year and contribute too much to each plan.
• You hold two jobs and two plans and fail to realize that the limit is per taxpayer, not per account.
• You receive a raise or a bonus, and neglect to change your contribution percentage accordingly.

How to Fix Excess Deferrals

If you over-contribute to your 401(k), immediately let your plan administrator know you made an excess deferral—hopefully before March 1 of the year following the one in which you over-contributed. The excess amount and any related earnings should be returned to you by April 15. If the excess amount isn't returned to you by that date, you may end up paying taxes on the amount twice: once in the year you contributed too much and once when the excess amount is returned to you.

The Bottom Line

There are annual limits to contributions investors may make into their 401(k) plans and IRAs. If you cannot invest the full amount possible, it is strategically shrewd to max out your investments into your 401(k) to earn the full employer match. Any remaining funds should be channeled to your IRA.