IRA and 401k Deferral Limitations

Maximum Contributions

Annual contributions are set annually and may be adjusted for inflation or based on new legislative changes. The 2011 IRA maximum contribution is $5,000 annually. A 401k maximum contribution is $16,500. Both an IRA and 401k have what are known as catch up contributions allowing those over the age of 50 higher limits. The contribution limit with catch up contributions included is $6,000 for an IRA and $22,000 for a 401k. All money contributed into either type of account grows deferred.

There are two basic deferral structures: traditional and Roth. Traditional structures allow investors to deduct contributions with distributions taxed as income. Roth structures get no deduction, but do get tax free distributions. The IRS allows traditional and Roth structures for both IRAs as well as 401k plans, though the 401k Roth structure is less commonly adopted by businesses. High wage earners may not be able to fully deduct all contributions made into a traditional IRA.

How much you can deduct from your income when contributing to a traditional IRA is contingent upon your marital status, adjusted gross income and whether you are covered by an employer plan. There are threshold ranges with full deductions allowed if you fall under the range, partial deductions allowed in the phaseout range and no deduction allowed if you are above the range. Single filers can make a fully deductible contribution with no income restrictions if they are not covered by an employer plan. When covered by an employer plan, the range is $56,000 to $66,000. Married couples not covered by a plan have a phaseout range of $169,000 to $179,000, with those covered by a plan having income limits dropping to $90,000 to $110,000.

The Roth IRA has income limits similar to a traditional IRA. However, the contingencies are marital status and income. Whether you are covered by an employer plan or not does not affect your ability to contribute. Because a Roth IRA does not get a deduction against income, the phaseout range applies to how much can be contributed. Falling under the range allows a full contribution, with partial contributions allowed between the range. No contributions are allowed if you are over the range. Single filers have a range of $107,000 to $120,000, while married couples have a range of $169,000 to $179,000.