IRS Announces New Income Limits for IRA Contributions in 2025

The IRS announced the 2025 limits for IRAs on Nov. 1, which includes new adjusted gross income and modified AGI for IRA contributions. In this issue, we provide the AGI limits for 2024 and 2025 and include reminders of how they have an impact on your eligibility.

No Increase for Regular IRA Contributions

The IRA contribution limit remains at $7,000, and the catch-up contribution for individuals aged 50 and older as of the end of the year remains at $1,000.

Reminders:

• Your regular IRA contribution cannot exceed your eligible compensation. For example, if your eligible compensation for 2025 is $4,000, the maximum amount you can contribute to your IRA for 2025 is $4,000.

Eligible compensation includes self-employment income, wages, salaries, and tips.

Rental income, dividends, interest, and profits from property investments are examples of income that are not eligible compensation. Consult with your tax advisor to determine if you have eligible compensation for the year.

• This IRA contribution limit applies on a per-person basis. Regardless of how many IRAs an individual owns, the limit is still capped at the amount above.
• If your spouse has little or no income and you file a joint tax return, your compensation can be used to meet the compensation requirement for their IRA contribution.
• When determining if you reach your maximum contribution amount for the year, add your regular traditional IRA contribution, your regular Roth IRA contribution, and any rollovers from 529 plans to your Roth IRA for the year.

Caution: Exceeding your regular IRA contribution limit could result in you owing the IRS an excise tax on the excess amount.

New Modified AGI Limits for Deducting traditional IRA Contributions

If you are not covered under an employer plan and are not married to someone who is, you can claim a deduction for the full amount of your traditional IRA contribution. But if you or your spouse (if married) are covered under an employer plan, your eligibility to deduct your traditional IRA contribution depends on your modified AGI.

Individuals covered under an employer plan for a year are considered “active participants” for the year.

Here are the modified AGI limits for 2024 and 2025 for each tax filing status:

Modified AGI Limits for 2024 and 2025 for Each Tax Filing Status

If you are covered under an employer plan for the year, your employer is required to check the “Retirement Plan” box in Section 13 of your Form W-2. If you are uncertain whether you are covered under an employer plan for the year, please consult your tax advisor.

If you are covered under an employer plan and your modified AGI falls within the partial range, you are not eligible to deduct the full amount you contribute to your traditional IRA. In such cases, you can split your contribution between deductible and nondeductible, or you can elect to treat the entire amount as nondeductible.

The following example demonstrates the formula for determining how much you can deduct if you are covered under an employer plan for 2025.

Example: 42-year-old Tom’s tax filing status is married filing jointly, and he is covered by an employer plan at work. The joint modified AGI for him and his spouse for 2025 is $132,000.

The maximum amount he can deduct for a traditional IRA contribution is $4,900, calculated as follows:

1. $132,000 (his joint modified AGI) - $126,000 (lower end of his modified AGI range) = $6,000.
2. Divide the results by $20,000 (the difference between the lower and higher end of his phaseout range: $146,000 – $126,000): $6,000 / $20,000 = 0.3.
3. Divide the results by the lesser of his eligible compensation or $7,000: 0.3 x $7,000 = $2,100.
4. Subtract the results from $7,000: $7,000- $2,100 = $4,900.

Tom is eligible to deduct $4,900 of his $7,000 traditional IRA contribution.

File Form 8606 for nondeductible contributions: If your contribution to your traditional IRA is nondeductible or treated as nondeductible, you must report it on IRS Form 8606. Failure to file Form 8606 could result in you owing income tax on distribution amounts that should be tax-free.

New Modified AGI Limits for Making Roth IRA Contributions

Participating in an employer plan does not affect your Roth IRA contribution. However, if your modified AGI exceeds the amount that is tied to your tax filing status, you are not eligible to make a regular contribution to your Roth IRA.

Here are the modified AGI limits for 2024 and 2025:

Modified AGI Limits for 2024 and 2025

If your modified AGI exceeds the limit above, any regular contribution made to your Roth IRA will result in an excess contribution.

Splitting Your Contribution Between a Traditional and Roth IRA

If your modified AGI falls within the “partial” range for a Roth IRA contribution, you may choose to split your contribution between your traditional IRA and your Roth IRA by contributing the eligible amount to your Roth IRA and the balance to your traditional IRA.

Example: 35-year-old Jane’s tax filing status is single, and her modified AGI for 2025 is $155,000. Her maximum Roth IRA contribution for 2025 is $4,670, calculated as follows:

1. $155,000 (her modified AGI) - $150,000 (lower end of her phaseout range) = $5,000.
2. Divide the results by $15,000 (the difference between the lower and higher end of her range): $5,000 / $15,000 = 0.333 (stop at three decimal points).
3. Divide the results by the lesser of Jane’s eligible compensation or $7,000: 0.333 x $7,000 = $2,330.
4. Subtract the results from $7,000: $7,000 - $2,330 = $4,670.

Jane is eligible to contribute $4,670 to her Roth IRA for 2025. If she wants to, she may contribute the difference of $2,330 to her traditional IRA.

If your tax preparer uses tax-preparation software, it should calculate the amount that you are eligible to contribute to a Roth and the amount you are eligible to deduct for a traditional IRA contribution.

New AGI Limits for the Saver’s Credit

Eligible individuals may receive a Saver’s Credit for contributions they make to their IRAs or employer plan accounts. This credit is available to individuals who are age 18 or over before the end of the year, not a full-time student, and not claimed as a dependent on another taxpayer’s return.

The rate for the Saver’s Credit is based on your tax filing status and ranges from 10% to 50%, not to exceed $2,000.

The AGI limits for the Saver’s Credit for 2024 and 2025 are as follows:

AGI Limits for Eligibility for Savers Credit: Salary Deferral and IRA/Roth IRA Contributions

Distributions made from your IRA or employer plan account during recent years could affect your eligibility for the Saver’s Credit. Please see IRS Form 8880, Credit for Qualified Retirement Savings Contributions for an explanation of the requirements, including any transaction that could affect your eligibility.

Start Planning for Your 2025 IRA Contribution Now

As the saying goes, “preparation is the key to success.” Start planning for your regular IRA contribution now to help ensure you maximize the benefits. The following are some planning tips to add to your IRA checklist:

• Make IRA contributions only if you are eligible to do so. Remember, eligibility for a Roth IRA contribution in 2024 does not guarantee eligibility for 2025—check to determine if you are within the modified AGI limits to contribute.
• Spread your IRA contribution throughout the year if you find it more manageable to do so. Some taxpayers find it easier to come up with $580 per month rather than $7,000 as a lump sum.
• If you make your contribution from Jan. 1 to April 15, clearly designate whether it is for the previous or current year when remitting the amount to your IRA custodian.

If you are unsure about whether you should contribute to a traditional IRA or a Roth IRA, consult with your tax advisor for assistance with choosing the one that is more suitable for you, or if you could benefit from both by splitting your IRA contribution between the two.