An IRA contribution generally starts with opening an IRA account with an eligible financial institution such as a brokerage or bank. You’ll probably have the option to manage your IRA yourself or allow the financial institution to manage your IRA. From there, you can make cash contributions to your IRA via bank transfers, check, or cash, in most cases. You can make contributions in one lump sum each year or spread them out. For any given tax year, you can make IRA contributions at any time up until the tax-return filing due date for that year, so you have more than just the calendar year to make contributions. For example, IRA contributions for 2022 can generally be made until around the tax-filing deadline in 2023. To make a traditional or Roth IRA contribution for a given year, you need to have taxable income for that year. You can then contribute the lesser of up to the amount of taxable income you earned or the annual contributions limits; in 2022, that’s $6,000 if you’re younger than age 50, and $7,000 if you’re 50 or older. In 2023, those numbers are $6,500 and $7,500, respectively. The taxable-income rule can help minors contribute to an IRA, such as if a teenager earns a few thousand dollars in part-time income. A parent or other family member might open a custodial account, which the child could then access in adulthood.
Example of IRA Contributions
For example, say you set up an IRA and decide to make automatic monthly contributions of $400 this year. In theory, the value of your contributions would grow as the investments included in your IRA increase in value.
Tax Benefits of Contributions to Traditional IRAs
In general, you can fully deduct your traditional IRA contributions if you are not covered by a retirement plan from your employer. If you do have access to a retirement plan at work, here are the general contribution deduction rules for tax year 2022, based on modified adjusted gross income (MAGI): Other types of IRAs, such as SEP IRAs, count as employer-sponsored retirement plans. These have significantly higher contribution limits, and they could affect your ability to deduct contributions to a traditional IRA.
What an IRA Contribution Means for Individuals
Understanding what IRA contributions are and how to make IRA contributions can help you save for retirement. Personal factors such as your income and access to a workplace retirement plan might influence the type of IRA you contribute to, if any. For those who do contribute, though, IRAs can help you save via tax deductions (traditional IRA) or tax-free qualified withdrawals (Roth IRA).
