The IRA (Individual Retirement Account) can be an important part of every American's source of income during retirement, but only when you have taken the time to fund it before it is time to retire. While it is possible to fund an IRA with unlimited amounts rolled over from other retirement plans (401k, 403b, 457, etc.) the week before you retire, not everyone has sufficient access to these types of plans at their place of employment.
But regardless of whether your employer offers a workplace retirement plan or not, an IRA can be an important ongoing part of every American's retirement plan, subject to certain limitations. These limitations vary each year, depending on your situation at the time. Today, we hope to shed some light on these limitations and highlight what these limitations imply about the value of the dollar over time.
IRA History
The IRA was first created as part of the Employee Retirement Income Security Act (ERISA) of 1974 in response to poorly managed pension plans at some places of employment. It was thought that besides establishing new guidelines for pension management for unions and corporations, a plan was needed to allow every American to save for their own retirement, regardless of the plan available to them at work.
Hence, the "Individual Retirement Account" was formed. The original contribution limit was the lesser of 15% of earnings for the year, or $1,500. The limit was increased in 1982 to $2,000. These limits have continued to increase over time, and currently (for 2024), the limits are $7,000 (if under age 50) or $8,000 (age 50 and above). However, these limits have important caveats to consider based on your personal circumstances.
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Investor's Guide
The Internal Revenue Service (IRS) released Notice 2023-75 on November 1, 2023, which covers the applicable 2024 contribution and deduction limits for various retirement plans, including IRAs (pages 3 and 4 of this document). As long as either you, your spouse, or both have what is considered "earned income" for the year, you are allowed to contribute to a traditional IRA. You are limited to the lesser of $7000 (under age 50) / $8000 (age 50 and up) and the amount of earned income you (or your spouse) received. If you and/or your spouse earned a total of $10,000, for example, you could have IRA contributions for $5,000 each, or one could have $7,000 and the other $3,000, or any combination thereof as long as the total IRA contributions did not exceed $10,000. If you and/or your spouse had "earned income" exceeding $14,000 (under age 50) / $16,000 (age 50 and up), then you could each have a maximum traditional IRA contribution of $7000 or $8000, depending on your age.
What is Earned Income?
For the purposes of making an IRA contribution, not all income is considered "earned income." Examples of earned income include money earned from employment, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment. It would also include (for those service members serving during a war or conflict) certain non-taxable income, such as combat pay, received while in service to the United States. Examples of income that is NOT eligible for IRA contributions include passive income, such as profits from the sale of property, rental income, interest, and dividend income, or any amount received as pension or annuity income or as deferred compensation. For a more complete listing of each type of income, consider this information directly from the IRS.
While there is no upper limit to the amount of income you can have and still be eligible to make a traditional IRA contribution, there are limits when it comes to how much of your traditional IRA contribution you can deduct from your income for tax purposes. There are also limitations to how much you earn, and make a contribution to a ROTH IRA. As a reminder, a traditional IRA allows you to reduce your taxes when you contribute (within certain limitations). A ROTH IRA offers no immediate tax savings but allows you to receive tax-free distributions later upon retirement. It is usually a good idea to have a mix of both of these types of IRAs, depending on your age and circumstances. For a more complete reading on the deduction and contribution limitations for both Traditional and Roth IRA's, you can consider IRS Publication 590 as the source document for the most accurate information available on the subject.
What IRA Contribution Limits Imply for the Dollar (and Gold)
By continuously increasing the IRA contribution limits over time, from $1,500 (1974) to $7000/$8000 today (2024), the government is telling us something about the Dollars of the past, present, and future. Fifty years ago, $1,500 was considered a respectable sum to set aside each year for your retirement. Today, we would have to set aside $7,000 or $8,000 each year to accomplish the same thing. And these contribution limits continue to increase over time. If we use the change in contribution limits from $1,500 to $8,000 over 50 years, this implies a reduction in the value of the dollar of 3.35% per year for 50 years. We know this rate of devaluation is not constant but varies with the rate of inflation. But for the sake of illustration, this means your IRA must grow by a minimum of 3.35% per year just to break even on purchasing power when you retire.
If we compare the change in IRA contribution limits to the change in the price of gold over the same period, we find some important food for thought. Using the average closing gold price in 1974 of $158.76 and today's price of $ 2,332, we can see that the value of gold has appreciated by an inflation-adjusted 2.04% annually, above the amount needed to protect your purchasing power over time. In other words, had you applied your $1,500 IRA contribution limit to purchase gold in 1974, you would have $22,074.67 in today's dollars. There are pros and cons to holding gold or silver in your IRA vs outside of your IRA. Regardless of whether it is held inside or outside, I believe owning gold can be a great way to inflation-proof your future income available to you and your family in retirement.
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byBill Stack