SIMPLE IRA vs. Traditional IRA: Which Retirement Plan is Right for Wealthy Retirees

“The only thing that stands between you and your dream is the will to try and the belief that it is actually possible.” – Joel Brown

Is your paycheck putting a dent in your traditional IRA dreams? Unravel the mystery of traditional IRA income limits with this guide! From deduction phase-outs to filing status and MAGI, we break it down so you can figure out if your income is cramping your IRA style. No need to drown in details—we’ve got your back on keeping your retirement plans intact!

Key Takeaways

  • Contribution limits for a Traditional IRA are set at $6,500 for those under 50 and $7,500 for those 50 and above, but eligibility and deduction amounts can be influenced by MAGI and whether you are covered by an employer retirement plan.
  • The SIMPLE IRA allows higher contributions, $15,500 for those under 50 and $19,000 for those 50 and older, offering a tax-deferred savings option for small business owners and self-employed individuals.
  • Strategies for maximizing IRA contributions include timing contributions to align with periods of lower income, using spousal IRAs to double retirement savings potential, and considering backdoor Roth IRA conversions to circumvent direct contribution income limits.

Navigating Traditional IRA Contribution Limits

Contribution limits for traditional IRAs are set at $6,500 and $7,500 for individuals under 50 and over 50 years old, respectively. These limitations dictate the annual amount that can be designated for retirement savings. There is an alternative option with varying contribution limits known as the Savings Incentive Match Plan for Employees (SIMPLE IRA), which will be explored below. One popular investment choice within both of these types of retirement plans is mutual funds.

In order to determine eligibility to contribute to a traditional IRA, one’s Modified Adjusted Gross Income (MAGI) must first be calculated. MAGI takes into account certain deductions added back onto one’s AGI and plays a significant role in determining options for investing through an IRA.

Understanding Modified Adjusted Gross Income (MAGI)

MAGI, or Modified Adjusted Gross Income, plays a crucial role in retirement planning. It combines your AGI with additional elements like student loan interest, untaxed foreign income, non-taxable Social Security benefits, and tax-exempt interest.

Knowing your MAGI is important because financial institutions use this figure to determine eligibility for different types of retirement plans. Additionally, your ability to contribute funds into a traditional IRA may be limited or completely phased out depending on where your MAGI falls within certain income thresholds based on filing status.

In other words, MAGI serves as an indicator of one’s overall earnings when it comes to making decisions about saving for retirement. It takes various sources of income into account, and its significance lies in the fact that it affects both eligibility for specific plans and contribution limits. This highlights the importance of being aware not only of one’s AGI but also of any supplemental items included under the umbrella term “MAGIA.” By understanding how these factors can impact their financial future, individuals are better equipped to make informed choices regarding their investment options, such as traditional IRAs and other forms of retirement savings accounts.

Delineating Deduction Phase-Out Ranges

The determination of deduction phase-out ranges significantly impacts your traditional IRA contribution plan. Your income level and whether you are enrolled in a workplace retirement plan play crucial roles in setting these limits.

For example, if you’re an individual taxpayer with coverage from a workplace retirement program, the 2021 deduction phase-out range is $66,000 to $76,000 [1]. For married couples filing jointly where one spouse participates in an employer-sponsored retirement savings scheme, the applicable ranges are between $105,000 and $125,000. It’s worth noting that when withdrawing funds from your traditional IRA account later on, you will be subject to regular income taxation.

Non-Deductible Contributions and Backdoor Roth IRAs

One option is to consider. A traditional IRA is making non-deductible contributions. These types of contributions use after-tax funds and are recorded on your tax return with Form 8606. The complexity of contribution limits and regulations for SIMPLE IRAs adds another aspect when using this strategy.

A potential alternative worth exploring is the ‘backdoor’ Roth IRA approach. This method involves contributing to a traditional IRA without taking a tax deduction and then converting it into a Roth IRA afterward. It can be especially beneficial for individuals with higher incomes that surpass the IRS’s income thresholds for direct contributions towards a Roth IRA.


The SIMPLE IRA is a viable option for self-employed individuals and small businesses seeking to create a retirement savings plan. It offers an uncomplicated approach for employers to make matching contributions toward their own and their employees’ traditional IRAs.

In 2023, the contribution limits for SIMPLE IRAs are $15,500 for those under 50 years old and $19,000 for individuals aged 50 or older. These contributions may not be subject to federal income tax withholding, but they do face social security, Medicare, and FUTA taxes. Nevertheless, this strategy provides opportunities to reduce taxable income while also allowing potential growth through tax deferral in the long term.

The Impact of Workplace Retirement Plans

Photo of workplace retirement plan documents

Participating in a retirement plan through your workplace does not prevent you from also contributing to an IRA. Both traditional and Roth IRAs are still available options for individuals enrolled in employer-sponsored retirement plans, with a contribution limit of $6,500 ($7,500 for those 50 years or older) per eligible employee or their eligible employee’s compensation per year – whichever is lower.

For spouses of active participants in workplace retirement plans, the same limits apply as any other individual contributing to an IRA. The annual maximum contributions allowed are $7,000 for each person in 2024 and $6,500 in 2023. For individuals over the age of 50 during these years, the limit increases to $8,000 and $7,000, respectively [2].

For Active Participants

The definition of an “active participant” in a traditional IRA is someone who has access to an employer-sponsored defined contribution retirement plan, either through their own or their spouse’s workplace. The IRS sets the maximum annual contribution limit for IRAs at $6,500 (or $7,500 for those over 50 years old). For individuals under 50 with a 401(k) plan available through work, contributions can go as high as $69,000.

Being designated as both active and eligible in a company retirement program may affect the tax deductibility of traditional IRA deposits depending on how much money employees put into their plans versus what employers contribute. As such factors vary among eligible workers and companies offering these benefits, potentially only certain amounts become tax deductible each year when filing taxes.

For Spouses of Active Participants

The participation of a working spouse in an employer’s retirement plan does not affect the non-working spouse’s ability to contribute to their employer contribution or own Individual Retirement Account (IRA). The contribution limit for IRAs is still $6,500 or taxable compensation if lower, with an additional catch-up allowance of $1,000 for those aged 50 and above. Married individuals filing jointly can also make spousal IRA contributions on behalf of their non-working spouses.

There are limitations when it comes to deductions for these contributions. If the modified adjusted gross income for married couples filing jointly exceeds $214,000 and one spouse has a work plan coverage from their job, the other may not be eligible to receive tax deductions on their IRA contributions. While this limitation exists at higher income levels, it does not completely eliminate the opportunity for both partners in marriage to contribute and benefit from their employer contributions to individual IRAs separately. Overall, a working partner participating in an employer-sponsored retirement plan does not prevent a non-working partner from making contributions or an employed spouse from contributing to society.

Strategies for Maximizing Your Contributions

Illustration of maximizing IRA contributions

To make the most out of your IRA contributions, it may be beneficial to plan them for times when you have a lower income. This can help maximize tax advantages. If you are a high-income earner, there are other options to consider, such as utilizing the backdoor method for Roth IRAs.

Another effective strategy is using spousal IRAs, where one working spouse contributes towards their non-working partner’s retirement savings. By doing so, this allows the household to double its overall IRA contributions and take advantage of potential tax benefits.

Timing Contributions Around Income Fluctuations

The timing of your IRA contributions can greatly impact the tax advantages you receive. The contribution deadline is typically April 15 each tax year, which presents an opportunity for strategic tax planning.

In times of fluctuating income, it may be beneficial to consider options such as a spousal IRA if one spouse has sufficient earnings or converting to a Roth IRA during years with lower income or market downturns in order to optimize your financial situation.

Utilizing a Spousal IRA

A spousal IRA allows the working partner to make contributions to their non-working spouse’s retirement account, effectively doubling the couple’s potential savings for post-work years. This is regardless of one spouse not having a personal income.

The maximum yearly limits for contributing to a spousal IRA are $6,500 or $7,500 (for those over 50), whichever amount is lower between these and their taxable earnings that year. These guidelines aim to ensure equal opportunities for non-earning spouses in building up funds for retirement.

How Income Affects Roth IRA Conversions

Photo of financial advisor discussing Roth IRA conversions

Switching over to a Roth IRA involves moving money from a traditional, SEP, or SIMPLE IRA, as well as defined-contribution plans like 401(k)s. While direct contributions to Roth IRAs have income limitations, converting does not impose any restrictions based on income levels.

When converting a traditional IRA into a Roth IRA, the converted amount is considered taxable income for that year and will be subject to taxes based on an individual’s current tax rate, which can range between 10% and 37%.

Conversion Eligibility and Income Limits

The eligibility for Roth IRA conversions is determined by an individual’s income, with the thresholds set at $153,000 or higher if single and $228,000 or higher if married filing jointly. These limits may increase to $161,000 in 2024 for singles and $240,000 in 2024 for couples.

However, high-income earners can still take advantage of a backdoor approach to contribute to a Roth IRA.

When converting traditional IRAs into Roth IRAs, the amount will be included as part of adjusted gross income (AGI), which could impact modified AGI (MAGI) calculations. This means that the conversion amount has the potential to affect one’s qualification status when it comes to certain earnings-based limitations or thresholds. However, recent laws do not impose any maximum limit on how much individuals are able to transfer from their traditional IRA accounts into their tax-free investment vehicles- otherwise known as “Rothification.”

Tax Implications of Converting

Reporting a conversion from a Traditional IRA to a Roth IRA is done through Form 8606 for IRS purposes. The Pro-Rata Rule comes into play when determining the taxation of tax-deferred funds upon withdrawal, particularly in cases where an investor has both pre-tax and after-tax funds in their traditional IRA. This rule carries significant implications for Backdoor Roth conversions.

It should be noted that there are no penalties attached to converting from a traditional IRA to a Roth IRA. Withdrawing early (before age 5912) from said account may result in a penalty fee of up to 10%.

When to Consult a Tax Advisor

Receiving advice from a tax advisor regarding IRA contribution limits and strategies can assist in reducing taxes, maximizing deductions, and effectively managing tax responsibilities. They possess the knowledge to offer guidance on minimizing taxable income within legal boundaries while considering financial planning matters such as retirement plans, investments, cash flow management, insurance coverage, and estate planning.

Complex Financial Situations

Challenging financial circumstances that may require the assistance of a tax advisor for IRA contributions include planning for retirement, managing investments and cash flow, addressing insurance needs, estate planning considerations such as Roth IRA conversions, and exploring alternative methods to fund Roth accounts.

To navigate these complex situations with regard to contributing towards IRAs, it can be beneficial to seek guidance from a tax advisor who can offer expertise in various areas. Some specific examples where their advice could prove valuable are helping individuals over 70 1/2 years old contribute towards traditional IRAs or making use of qualified charitable distributions (QCDs). They may provide recommendations on how best to make contributions towards Roth IRAs while also identifying available deductions and credits one might be eligible for.

Planning for Future Tax Changes

Staying up to date with potential changes in tax laws is crucial when it comes to making IRA contributions. By being aware of these changes, you can effectively manage your finances and take advantage of tax benefits offered by options such as a Roth IRA’s tax-free growth.

Financial advisors are equipped to provide the following services:

  • Guidance on taxes
  • Integration of strategies for effective financial planning
  • Assistance in reducing clients’ overall tax burden

Help clients make informed decisions about their Roth IRA contributions, considering future shifts in taxation policies.

Empowering Financial Futures: The Institute of Financial Wellness Leading the Way

Illustration of financial wellness resources

At the forefront of financial institutions stands The Institute of Financial Wellness. Our primary focus is to offer extensive financial education, tools, and assistance for individuals striving to achieve their monetary goals. We provide expert advice on various topics such as planning for retirement, evaluating one’s current retirement status quo, attaining objectives through webinars or workshops, and maximizing income while minimizing taxes. Moreover, the institute also offers continuous support in order to ensure sustained financial prosperity.

Full Summary

Understanding the specific details of traditional IRAs, SIMPLE IRAs, and Roth IRAs can aid in planning for a secure retirement. Whether you are self-employed or work for a small business or large company, there is an IRA option available to meet your individual needs. Remember that it is not simply about saving for retirement. Strategic contributions should also be considered to maximize savings and minimize tax liabilities.

Frequently Asked Questions

Is there an income limit for a traditional IRA?

For a traditional IRA, there are income limits based on your filing status and MAGI. If you are below the specified thresholds, you may make full or partial contributions. However, there are no income limits for contributing to a traditional IRA as long as you are working.

Should I contribute to a traditional IRA if my income is too high?

It is important to note that if your income exceeds the designated limits, you will not be able to contribute pre-tax funds to a traditional IRA. You can still make contributions with after-tax money and enjoy tax-free growth.

It’s crucial to keep in mind that there are also restrictions on how much you can contribute overall to your IRA.

How does the SIMPLE IRA work?

With a SIMPLE IRA, you and your employees can set aside a percentage of their pay for retirement, with the money growing tax-deferred until withdrawal. Contributions are subject to income taxes upon withdrawal from the account.

A SIMPLE IRA offers a simplified method for small employers to contribute to their employees’ and their own retirement savings, with employees being able to make salary reduction contributions and the employer required to make matching or nonelective contributions.

What are the contribution limits for a traditional IRA and a SIMPLE IRA?

For traditional IRA accounts, the maximum amount an individual can contribute is $6,500 if they are under 50 years old and $7,500 for those who are aged 50 or older. For SIMPLE IRAs, individuals under 50 have a contribution limit of $15,500, while those aged 50 and above can contribute up to $19,500.

What is a spousal IRA, and how can it help maximize contributions?

One option for increasing retirement savings potential is through a spousal IRA, which enables the employed spouse to contribute funds into an individual retirement account on behalf of their non-working partner. This effectively doubles the couple’s ability to save and can lead to a more financially stable future [3].

By taking advantage of this opportunity, couples are able to maximize contributions towards their retirement goals and create a stronger foundation for both individuals during their golden years.

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