How Much to Contribute to an IRA

Contribution Limits

For 2011, you can contribute up to $5,000 to a traditional or Roth IRA. If you are at least 50 years of age, you can contribute an extra $1,000, for a total of $6,000. If you can afford to do so, you should aim to max out the IRA account of your choice, since the tax savings can be quite significant. If you invest in a traditional IRA, you get an immediate tax break and only pay taxes when you take the money out. With a Roth IRA you give up that immediate tax break, but you can enjoy a tax-free stream of income in retirement.

Chances are you will not have enough disposable income to fully fund both an IRA and a workplace retirement plan. After all, you can contribute up to $16,500 to a 401k plan, plus an extra $5,500 if you are 50 and older. If you do not have enough to fully fund both plans, you need to look at your investment options carefully and decide where best to allocate your funds.

Many workers contribute enough to their 401k plans to get the full company match, then next work on fully funding their IRA accounts. If there is money left over, those workers can raise the contribution percentage on their 401k to take advantage of additional tax savings.

The more guaranteed sources of retirement income you have, the less you have to save on your own. You can generally count on Social Security to replace about 40 percent of your pre-retirement income, and if you have a pension plan or annuity you can enjoy that income as well. But if you do not have a traditional pension or other source of income besides Social Security, you should ramp up your IRA contributions and save as much as you can. You should also look at your other retirement accounts, including your 401k plan, and use it to put aside as much extra money as you can.

Not all workers can contribute to an IRA account, so it is important to check your eligibility before you put any money aside. The IRS publishes its annual income guidelines at its website, and changes those limits from time to time. Moderate- to high-income earners with access to a retirement plan at work face restrictions when contributing to a traditional IRA, while high earners may also find their ability to contribute to a Roth IRA account restricted.