Maxing out your IRA can be an excellent way to increase your financial security later in life. But which of the two main IRA types — traditional or Roth — is the better choice for you in 2024?
Here’s a rundown of how much you can contribute to an IRA in 2024, the benefits of each type, and other important things to consider.
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What does it mean to “max out” an IRA?
The maximum contribution you can make to an individual retirement account (IRA) is set each year and changes to keep up with inflation over time.
For 2024, the IRA contribution limit is $7,000. There is an additional $1,000 catch-up contribution allowed for account owners who are 50 or older.
You can have more than one IRA. There’s no rule that says you can’t contribute to both a traditional and Roth IRA in the same year. However, be aware that the $7,000 maximum is per person, not per account, so your total contributions to IRAs for 2024 cannot exceed the limit.
Which account type is best for you?
The biggest difference between the two IRA account types is the tax treatment. Traditional IRA contributions can qualify for a tax deduction in the year they were made, but your eventual withdrawals from the account will be considered taxable income.
On the other hand, Roth IRA contributions are not tax-deductible, but qualified withdrawals are 100% tax-free, even if your investments have earned many thousands of dollars. In either case, your investments grow tax-deferred while in the account, meaning that you won’t have to pay taxes each year on interest, dividends, or capital gains generated within the account.
In addition to the main tax difference, Roth IRAs have a couple of other unique advantages:
- With a Roth IRA, you are free to withdraw your contributions at any time, and for any reason, without penalty. Your investment gains must remain in the account until you reach age 59 1/2 or have another qualifying reason for withdrawal.
- With a traditional IRA, you have to start taking withdrawals (known as required minimum distributions, or RMDs) by the time you’re 73. Roth IRAs have no required withdrawals. If you don’t need the money, you can leave it in the account indefinitely.
Can you max out a traditional or Roth IRA in 2024?
While the 2024 maximum IRA contribution is $7,000 ($8,000 if you’re over 50), not everyone can take full advantage.
With a traditional IRA, everyone can contribute. However, to be able to claim the traditional IRA tax deduction (the main reason people usually choose a traditional IRA), one of two things must be true:
- You are not covered by a retirement plan at work, and neither is your spouse (if you’re married).
- Your income is below certain limits set by the IRS for your marital status. For example, if you are single and have a retirement plan at work, you need modified adjusted gross income (MAGI) of $77,000 or less to take a full deduction, and less than $87,000 to qualify for a partial deduction.
With a Roth IRA, there’s an income restriction that applies to everyone, but it’s significantly higher than those for the traditional IRA deduction. For example, the MAGI limit for a full Roth IRA contribution for single individuals is $138,000 in 2024, and this is regardless of whether you have a retirement plan at work.
The bottom line
One important thing to mention is that the best choice for you can change over time, and even year to year. If you are in a higher tax bracket, a traditional IRA could be the smartest choice for you. But if you have a year where your income (and marginal tax rate) is relatively low, it could be a good opportunity to contribute to a Roth IRA.
The bottom line is that the right type of IRA for you depends on your personal financial situation and your goals. But whichever IRA you choose, maxing it out in 2024 can be a smart step toward financial security later in life.