IRA 2014 Contribution Limits: How Much Can You Sock Away?

Most of us know that if we want to be prepared for retirement, we should be exploiting tax-advantaged investment accounts available to us, such as IRAs. We don't always know how much we can sock away in them, though, and that's kind of important. Thus, it's worthwhile to know the IRA 2014 contribution limits.

First, here's the scoop on IRAs in general. There are two main kinds of IRAs: traditional and Roth.

• With a traditional IRA, you sock money away on a pre-tax basis and it grows tax-free -- until you withdraw funds from it. At that point, assuming you've followed the rules, the withdrawn dollars are taxed at your income tax rate. That rate in retirement may well be lower than the rate you're taxed at now, while working. Meanwhile, your pre-tax contributions lower your taxable income, so you end up paying less. (In a simplified example, if you earn $50,000 and contribute $5,000, your taxable income drops to $45,000.)
  

• With a Roth IRA, you contribute post-tax dollars, so your immediate taxes are unchanged. The money grows untaxed in your account until withdrawn in your retirement years. At that point, if you've followed the rules, it's withdrawn tax-free. That can be a big deal if you've saved a lot of money and have invested it effectively.

The limits
So what are the IRA 2014 contribution limits? Well, for most folks, the contribution limits for IRAs in 2014 are $5,500, plus an extra $1,000 for those 50 or older, as a "catch-up" measure, for a total of $6,500.

There are some extra wrinkles to IRA contribution limits, of course (for 2014 and other years). To contribute to a Roth IRA, your contributions must be made with earned money. That's no problem for most of us, but if you're a young person sensibly starting early with your retirement savings, you can't fund an IRA with allowance or bat mitzvah money.

Contribution limits for IRAs in 2014 and other years have some other rules, too. Folks earning any level of income can contribute to traditional IRAs, but folks with above-average incomes may find that their ability to contribute to a Roth IRA is reduced or eliminated. The IRS spells out the details on its website. For 2014, the Roth IRA contribution limits are unchanged for single filers with modified adjusted gross income of less than $114,000 and for married couples who file jointly and have AGIs of less than $181,000.

One way to sort of get around Roth IRA contribution limits in 2014 and other years is to convert a traditional IRA to a Roth one. But run the numbers first, because any sum you convert will be counted as taxable income to you in the year of conversion. (Remember, it was never taxed when it went into the traditional IRA.) Thus, converting large sums can be costly upfront but potentially worth it in the long run. You might even be able to convert your 401(k) to a Roth IRA.

401(k) limits
Because you're here learning about IRA 2014 contribution limits, here's a bonus -- the scoop on contribution limits for 401(k) accounts in 2014. 401(k)s work much like traditional IRAs, tax-wise. The 2014 contribution limits for 401(k), 403(b), and most 457 plans are $17,500, plus an extra $5,500 for those age 50 or older.

Spend a little time reading up on the retirement savings vehicles available to you and the smart tax strategies you can employ, and you may find yourself enjoying a very comfortable retirement.

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The article IRA 2014 Contribution Limits: How Much Can You Sock Away? originally appeared on Fool.com.

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