Why are there contribution limits on IRAs?


Quick Answer

There are contribution limits on Individual Retirement Accounts to limit the amount of money a taxpayer can put into an IRA to use as a tax shelter. The key advantage of an IRA account is not having to pay taxes on retirement savings for an extended period of time.

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Full Answer

Allowable contribution amounts also consider the individual's income. There are restrictions for higher-income taxpayers to contribute, again preventing tax shelter abuse by wealthier earners. The IRS incorporates a cap on contributions to minimize tax losses.

There are two key types of IRAs: traditional and Roth. Both have tax advantages, but the key difference is the Roth IRAs are designed to give tax-free growth versus the upfront tax advantages of a traditional IRA.

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