Why IRA, Roth IRA, and 401(ok) Contributions Are Restricted

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Contributions to traditional IRA, Roth IRA, 401(k), and other retirement savings plans are limited by the Internal Revenue Service (IRS) to prevent the wealthy from benefiting more than the average worker from the tax advantages they offer.


Contribution limits vary by the type of plan, the age of the plan participant and, in some instances, by how much they earn.


Key Takeaways

  • The IRS caps contributions to retirement savings plans to prevent high earners from benefiting more than the average worker from the tax benefits they offer.
  • Contribution limits vary by the type of plan and the age of the plan participant.
  • In some instances, contributions are not allowed for those who are considered high earners by the IRS.


Retirement Plan Tax Advantages

Contributions to traditional IRA and 401(k) accounts are made with pretax dollars, so they can offer a significant reduction to a worker’s annual income tax burden. Contributions are capped to ensure that those who can afford to defer large amounts of their compensation do not take undue advantage of this tax benefit. Investments grow tax-deferred, but withdrawals are subject to income tax.


Roth IRA and Roth 401(k) contributions are made with after-tax dollars. Investment growth and withdrawals are not subject to tax. Roth plans are particularly beneficial to people who will be in a high tax bracket in retirement.



401(k) Contribution Limits

In 2019, the maximum employee contribution to a 401(k) plan, either traditional or Roth, is $19,000. Employers can also contribute through either non-elective deferrals or contribution matching. However, in 2019 the total contribution from all sources must not exceed the lesser of the employee’s compensation or $56,000.


If you have both a traditional and a Roth 401(k), the total of all your contributions to both accounts cannot exceed $19,000, or $25,000 if you are age 50 or over.

To encourage those nearing the end of their working years to contribute more, the IRS also allows additional catch-up contributions for employees who are age 50 or over. In 2019, the catch-up contribution is $6,000. As long as you keep working at your employer, you can continue to contribute to either type of 401(k), no matter how old you are.



Non-Discrimination Testing: 401(k)s Only



For the 401(k) plan to retain its qualified status, contributions made by employees who earn large salaries—more than $120,000—must not exceed a certain percentage of the average contribution made by non-highly paid employees. This prompts higher-level employees, such as executives and management, to encourage plan participation among the rank and file. As the average regular employee contribution increases, the amount that more highly compensated employees are allowed to contribute increases, up to the annual maximum.



IRA Contribution Limits

For 2019, IRA participants are limited to a maximum contribution of $6,000, or 100% of their compensation, whichever is lesser. Those age 50 and over can make catch-up contributions of up to $1,000 annually. If you are still earning eligible income at age 70½, you can continue to contribute to a Roth IRA, but not to a traditional IRA.


Like 401(k) plans, the contribution limits for IRAs apply to all accounts held by the same person. If you have both a traditional and a Roth IRA, the total of all your contributions to both accounts cannot exceed $6,000, or $7,000 if you are 50 or over.



Leveling the Playing Field

IRAs are not qualified retirement plans because they are not offered through an employer. There is no provision for the type of non-discrimination testing that applies to 401(k) contributions.


However, IRAs were developed to encourage the average worker to save for retirement and not as another tax shelter for the rich. To prevent unfair benefit to the wealthy, the amount of your contribution to a traditional IRA that is tax deductible may be reduced if you or your spouse is covered by an employer-sponsored plan, or if your combined income is above a certain amount.


In addition, Roth IRA contributions are phased out for those making above a certain amount. In 2019, the contribution limit is reduced for single persons whose modified adjusted gross income (MAGI) is more than $122,000 and $193,000 for married couples filing jointly. Individuals who earn more than $137,000 and couples who earn more than $203,000 are not eligible to contribute to Roth IRAs.




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