What is an IRA contribution?

Introduction to IRA contributions

An individual retirement account (IRA) is a special type of investing account that can provide unique tax advantages while helping you save for the future. IRA contributions, simply put, are money you put into an IRA.

There are several different types of IRA available, each with different tax benefits. All four allow you to make contributions every year you meet the eligibility requirements from the IRS. Those requirements can vary from account to account and year to year.

The four most common IRAs are:

• Traditional IRA
• Roth IRA
• SEP-IRA (SEP is short for Simplified Employee Pension)
• SIMPLE IRA (SIMPLE is short for Savings Incentive Match Plan for Employees)

Traditional IRA contributions may be tax deductible, helping you reduce your taxable income and potentially increasing the size of your refund. Roth IRA contributions are not tax deductible, but your savings in a Roth IRA can grow tax free.

You can only participate in a SEP-IRA or SIMPLE IRA if you are self-employed or your employer offers one. Their details and tax benefits are somewhat complicated. The IRS offers detailed SEP-IRA FAQs and SIMPLE IRA FAQs.

Understanding contribution limits

Every year, the IRS defines how much money you can contribute to your IRA. The limits depend on several factors, including the type of IRA you have, your income, and your age.

2023 contributions limits

How much of your contribution to a traditional IRA you can deduct from your taxes depends on your income, filing status, and whether you have a pension plan/retirement plan available through your employer. Roth IRA contributions are not tax deductible.

SEP-IRAs are for small businesses and self-employed individuals. When you are self-employed, you can contribute to your own SEP-IRA as an employer, treating yourself as an employee. In 2023, the employer contribution is $66,000 or 25% of your compensation as an employee, whichever is lower.

The 2023 contribution limit for a SIMPLE IRA is $15,500. If you are age 50 or over, you may be able to make up to an additional $3,500 in catch-up contributions. Your total contributions to all your employer-sponsored plans, including a 401(k) or 403(b), cannot add up to more than $22,500. 

IRA contribution deadlines and timing

The deadline for making annual IRA contributions is the same as the tax filing deadline for the year.

You have until April 15, 2024, to make a 2023 contribution to a traditional IRA, Roth IRA, or SEP-IRA. If you miss the deadline, you will not be able to make a 2023 contribution. April 15, 2024, is also the deadline for 2023 employer contributions to a SIMPLE IRA.

People who live in parts of Alabama, Georgia, and California, where the IRS extended the 2023 federal tax deadline (due to natural disasters) have until October 16, 2023, to file their 2022 taxes and make a 2022 IRA contribution.

If you make excess contributions to your IRA—that is to say, contribute more than the IRS allows for the year—you have until the tax filing deadline to withdraw the money plus any income earned it. The IRS taxes any excess contributions that you do not remove at a rate of 6% per year.

Spousal IRAs

If you work and your spouse does not, you may set up and contribute to an IRA for each of you. The spousal IRA can be either a traditional IRA or a Roth IRA and has the same contribution rules.

IRAs can be a great way to save for your retirement, and the tax benefits can be really valuable. Choosing an IRA and following all the rules can be stressful, though. A Jackson Hewitt Tax Pro can help you make the most of the IRA opportunity.