IRA Contribution Limits to Keep In Mind When Investing

Using tax-advantaged funds to actively invest in your retirement – IRAs are a great vehicle for retirement saving. But the government has set IRA contribution limits in place, which are designed to prevent investors from taking excessive advantage of Roth IRAs or traditional IRAs. Even self-directed IRAs are subject to these contribution limits, even though they usually offer a greater degree of investment freedom. CARL offers sophisticated quant hedge fund strategies and the self-directed retirement accounts to invest in them. While you will still have to keep contribution limits in mind for new retirement investment, you can move over other retirement funds you already have into a new CARL self-directed IRA.

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Finance 101: What Is an IRA?

Individual retirement accounts were once deemed "the biggest tax break in history". Today, IRAs are a reliable investment vehicle for retirement planning. There are a couple of reasons for that:

  1. The only prerequisite to be eligible for an IRA is that you must have active income.
  2. You have to be younger than 72 when the withdrawal period starts.
  3. There are many different types of IRAs, perfect for all of your investing needs.

The biggest draw for any type of IRA is their tax-deferred nature. Depending on which type of IRA you have, you can benefit from tax-deferred contributions or tax-free deductions as part of your retirement plan. As of 2020, contribution limits to the various account variants have changed, but the age limit on making contributions was repealed.

Individual retirement accounts were once deemed "the biggest tax break in history". Today, IRAs are a reliable investment vehicle for retirement planning. There are a couple of reasons for that:

  1. The only prerequisite to be eligible for an IRA is that you must have active income.
  2. You have to be younger than 72 when the withdrawal period starts.
  3. There are many different types of IRAs, perfect for all of your investing needs.

The biggest draw for any type of IRA is their tax-deferred nature. Depending on which type of IRA you have, you can benefit from tax-deferred contributions or tax-free deductions as part of your retirement plan.

The Original, Traditional IRA

Established in 1974, the traditional IRA is an investment vehicle set up at a bank, broker-dealer, or any other financial institute which offers such services. Although there are contribution limits, all contributions to a traditional IRA are tax-deductible, which means the funds placed in it are pre-tax dollars which are subtracted from your total taxable income that year. By the age of 72, owners of a traditional IRA are required to make withdrawals from the account. There are also rules concerning these required minimum deductions (RMD). If you fail to make a required deduction upon reaching the age of 72, the Internal Revenue Service will apply a 50% tax on the amount of money you were required to withdraw.

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Despite being tax-advantaged, you still need to pay taxes on a traditional IRA; as all withdrawals are taxed as income. This is why traditional IRA contributions are only "tax-deferred," as you still need to pay taxes on the money – you just do it once you take it out of your account again.

Additionally, early withdrawals by owners under 59.5 years of age are penalized with a 10% tax in addition to any other taxes which may apply. There is room for exceptions here, though. For example, if a beneficiary withdraws money to make a first-time home purchase, spends them on higher education, health insurance, or other important financial obligations as defined by the IRS.

Roth IRA, the Updated Version

The Roth IRA was initially intended to replace the traditional IRA. However, the newly introduced retirement account type quickly became an alternative retirement plan instead of a successor.

You could say that it kick-started the invention of many more types and variants to follow. A couple of things distinguish a Roth IRA from the traditional variant:

  1. Roth IRA contributions are paid with post-tax money.
  2. All of the account's investment earnings are tax-free.
  3. Roth IRA contributions can be withdrawn tax-free.

No matter whether we're talking about employer contributions or your own – withdrawing money you contributed to your Roth IRA is always tax-free, penalty-free and can be done at any point in time. However, the same rule doesn't apply to your investment earnings made with a Roth IRA. If you want this money to be tax-free, you are bound to a set of rules. You would have tax-free access to returns made from the account, if you meet one of these conditions:

  • you are at least 59.5 years old
  • the Roth IRA has existed for a minimum of 5 years
  • they are used for buying, building, or rebuilding a first home (maximum of $10,000)
  • you become disabled

The so-called five-year rule holds particular importance – it requires that you need to have had your Roth IRA for at least five years before you can withdraw money. This means that once you are 59.5 and you've had your account for five years or more, you can freely withdraw tax-free money from it. 

Where a traditional IRA requires mandatory withdrawals beginning at age 72, Roth IRAs are not affected by these RMDs – you don't have to withdraw money if you don't want to.

The Self-Directed IRA – An Investor’s Dream

Both traditional IRAs and Roth IRAs are regulated heavily in terms of what you can invest in. Investors aren't legally allowed to use the funds from these accounts to invest in most high-yield alternative investment opportunities such as cryptocurrencies or quant hedge fund strategies, to name just a few examples. You're basically limited to investing in common securities such as ETFs, bonds, stocks, and the like.

self-directed IRA is a perfect alternative to set up if you want to take full advantage of alternative investments. Most IRS restrictions on investing don't apply to this variant. Instead, you're allowed to choose from a broad array of investment vehicles unavailable to owners of other IRS variants.

Setting up a self-directed individual retirement account leaves you with one decision: Do you want it to be treated like a traditional IRA, with its fully tax-deductible contributions? Or do you prefer the Roth IRA variant with tax-free distributions? Your SDIRA can be either a traditional or a Roth account in addition to being "self-directed."

The "self-directed" in the name refers to how the account is managed. Instead of a custodian or trustee managing the IRA, you as the account holder are fully responsible for making investments, IRA contributions, and deductions. Also, your account custodian is prohibited from giving you either investment or financial advice.

In an SDIRA, all authority on researching, investing, due diligence, and managing assets lie with the account holder.

Where can you open an SDIRA? Most common providers for traditional, Roth, SEP IRAs, or SIMPLE IRAs don't offer the option to have the retirement plan be self-directed. Such accounts are mostly available at specialized firms. If you're planning to use your IRA contributions to invest in sophisticated quant hedge fund strategies, CARL's self-directed IRAs are the perfect investment vehicle for you.

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IRA Contribution Limits – How Much Can You Invest Annually?

In recent history, the IRS has raised the IRA contribution limit nearly every year. The intention behind that is to keep up with changes in financial markets, such as rising inflation and the ever-increasing cost of living. However, the IRA still defines contribution limits. The limits for 2021 and 2022 are:

  • current annual maximum contribution is $6,000
  • if your annual taxable compensation is less than $6,000, this amount is your new upper limit

Also, there is a catch-up mechanic included in all IRA types for individuals aged 50 and older. If you have reached that age, the annual limit increases to $7,000. These two limits apply for any contribution to your account, with two exceptions:

  • contributions from rollovers
  • qualified reservist repayments

Anyone who rolls over an individual retirement account from one type to the other (i.e., changing a traditional account to a Roth IRA) is allowed to exceed these limits. Or reservists who were called into active duty after September 11, 2001, they are also exempt.

Another important factor for the contribution limits is the filing status of the account holder. Although the status does not affect the actual limit, it directly affects an account holder's eligibility. As you have to choose either a traditional or Roth IRA, you have to be clear on the income limit at play for the Roth IRA. In short, the higher your adjusted gross income in a year, the less likely it is for you to be allowed to make a full contribution at the maximum of the income limit for your Roth IRA:

Filing statusmodified adjusted gross income (modified AGI)Roth IRA contribution limit
married filing jointly<$196,000$6,000 ($7k above age 50)
married filing jointly>$206,000$0
single filer<$124,000$6,000 ($7K above age 50)
single filer>$139,000

$0

Traditional IRAs, on the other hand, have IRA income limits which define if your contributions are fully deductible, partially deductible, or not deductible at all. However, these traditional IRA contribution income regulations only apply if you or your spouse possess a workplace retirement plan

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Investing in quants is as easy as pie if you've got CARL on your side. Investors can set up an CARL account quickly and easily.

Set Up Your Account

Quickly and securely connect your CARL account to your bank and transfer investment funds.

Analyze Investments

Using the tools within the CARL app, determine which strategies at what allocations are right for your investment goals.

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Investing and IRA Contribution Limits

The IRS has set up very clear rules on the maximum annual amount of money you're allowed to put into your retirement account. But you can use these assets to grow your wealth for your retirement. A self-directed IRA is the best option to choose if you want to explore alternative investments such as cryptocurrencies or quant hedge fund strategies. Using CARL's SDIRA is the perfect choice for anyone wanting to venture into the world of sophisticated quantitative investment strategies, maximizing your gains and limiting risk due to in-built risk-control mechanisms.

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Introducing CARL Self Directed IRA

The CARL Self Directed IRA is now live on the CARL app. Listen to this podcast episode where John Bowens from Equity Trust, our partner in this offering, and Jamie Uppenberg from CARL talk about self-directed IRAs and the benefits of alternative investments like the hedge funds available with CARL.

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