Must-Ask Questions: IRA Contributions

An employer-sponsored retirement plan isn't your only way to save for your future. Indeed, if your employer offers a plan—and a match—you'll want to contribute at least enough to earn the full amount. The next best place to save—especially if you don't have a retirement plan at work—is an individual retirement account (IRA). 

"The ability to defer taxes, invest for potential growth, and—with a Roth IRA—make tax-free withdrawals in retirement are some of the reasons to consider an IRA," said Rob Williams, managing director of financial planning, retirement income, and wealth management at the Schwab Center for Financial Research. "But before you open one, it's important to understand the rules and how each type of IRA differs," Rob explained. 

Here are eight must-ask questions about IRA contributions—who, how much, pre-tax versus after-tax, and more. 

Anyone with earned income (salary, wages, or tips from a job or self-employment) can contribute to a traditional IRA. To contribute to a Roth IRA, your income must fall below a certain limit, but there are no age restrictions.

For 2024, the annual maximum IRA contribution is $7,000 if you're under 50, or $8,000 (including the $1,000 catch-up contribution)¹ if you're 50 or older. Keep in mind, your annual IRA contributions can't exceed your income for the year. And if your income goes over the IRS threshold, your contributions to a Roth IRA will be capped or phased out. You can contribute to multiple IRAs in the same year (for example, a traditional IRA and a Roth IRA), but your combined contributions can't exceed the annual maximum.

Note: As a reminder, you still have until April 15, 2024 to make your 2023 contribution, if you haven’t done so already. Make sure to write down the contribution year on your check otherwise your IRA custodian may think it’s for 2024.

Pre-tax IRA contributions are generally tax-deductible and allow you to delay taxes until you withdraw money from your account. After-tax contributions are made with income you've already paid taxes on. There's no up-front tax break. You can contribute pre-tax or after-tax dollars to a traditional IRA,² but Roth IRA contributions can only be made with after-tax dollars.  

Contributions to traditional IRAs are generally tax-deductible. But if you or your spouse have a 401(k) or other employer retirement plan in addition to a traditional IRA, you'll also need to meet certain income limits to get the deduction. Contributions to Roth IRAs aren't tax-deductible because they're made with after-tax dollars.

You can treat an IRA that you inherit from your spouse as your own and make contributions. But if you inherit it from someone other than your spouse, you can't make contributions. Certain rules also apply when it comes to taking money out, including when you're required to start withdrawing funds and how long you have before you have to empty the account. The rules can be complicated, so consider working with a tax advisor to avoid costly mistakes.

In most cases, you must have earned income to contribute to an IRA. So, if you're completely retired, you won't be eligible. One exception is a spousal IRA, which allows a non-working spouse to contribute to an IRA as long as the other spouse is still working and the couple files a joint return. 

Contributing more than the annual IRA contribution limits allow can trigger a 6% penalty. In most cases, you can remove the extra funds, but you may still owe a penalty. If you overcontribute to a traditional IRA, you may also owe additional taxes on your withdrawals. For the best outcome, consider talking to a tax advisor about your specific situation.

Most IRAs offer a wide selection of investment choices, such as individual stocks, bonds, mutual funds, ETFs, and certificates of deposit (CDs). If you're not comfortable building your own diversified portfolio based on your goals and risk tolerance, consider an IRA that offers portfolio guidance or automated investing.