A Roth Individual Retirement Account (IRA) can be a useful tool for retirement planning. These tax-efficient accounts offer a way to save money on top of what you might be contributing to a 401(k) or similar workplace plan. And if you don’t have a workplace retirement plan, you can always use a Roth IRA to invest in the future. Your ability to contribute to a Roth IRA and the amount you can invest each year is determined by your filing status and income. Each year, the IRS updates Roth IRA income limits and contribution limits to keep pace with inflation. For more advice on how a Roth IRA can fit into your financial plan, consider connecting with a trusted financial advisor for free.
Roth IRA: how it works
A Roth IRA allows you to save after-tax dollars for your retirement. This means that you have already paid taxes on the money you contribute.
The benefit of this is that once you retire and start receiving qualified distributions from your Roth IRA, those distributions are 100% tax-free. It’s the opposite of a traditional IRA, where you make pre-tax contributions that may be tax-deductible, while paying taxes on retirement withdrawals.
A Roth IRA might be a good option if you expect to be in a higher tax bracket when you retire. You can contribute money during your working years at a lower tax rate, then withdraw those contributions and their earnings tax-free later.
For 2023, the maximum amount you can contribute to a Roth IRA is $6,500. You are allowed to increase this amount to $7,500 if you are 50 or older. These same limits apply to traditional IRAs. And it should also be noted that this is a cumulative limit. If, for some reason, you have both a traditional IRA and a Roth, your total contributions to both accounts cannot exceed the annual limit when combined.
Unlike traditional IRAs, there is no deadline for withdrawing money from your Roth IRA. Traditional IRAs require minimum distributions which must begin at age 73. With a Roth IRA, you can continue to add money to your account as long as you’re working and earning income. And you can leave the money you invest in your Roth IRA as long as you want so it can continue to grow.
If you’re ready to be matched with local advisors who can help you achieve your financial goals, start now.
Who can contribute to a Roth IRA?
Roth IRAs can offer unique tax advantages, but there is one caveat; not everyone is eligible to contribute. Your ability to contribute to a Roth IRA is based on your income and tax status. Roth IRA income limits are set by the IRS and updated annually. There are different income thresholds, depending on filing status.
So you may be able to make a full contribution to the Roth IRA if you fall below an income threshold, but your contribution amount may be reduced if your income is above that same threshold.
It’s different from a traditional IRA, which limits your ability to deduct your full contributions based on your income, filing status, and coverage under an employer’s workplace retirement plan. .
Roth IRA income limits for 2023
Roth IRA contributions for 2022 can be made up to the April filing deadline for your 2022 taxes. You can, of course, specify that your contributions during the year 2023 count towards the tax year 2023. But before contributing, you must first determine if you are eligible to do so, based on your income.
You can contribute in full for 2023 if:
-
You are married, jointly filing or widowed and have an adjusted gross income (AGI) of less than $218,000
-
You are filing single or head of household and have an AGI of less than $138,000
-
You are married, file separately, do not live with your spouse and have an AGI of less than $138,000
Note that if you’re married and filing separately but live with your spouse, you can’t contribute anything to a Roth IRA if your AGI is over $10,000.
The IRS also allows you to make Roth IRA contributions on a reduced basis if your income exceeds the threshold to make a full contribution. For 2023, you can contribute a reduced amount if:
-
You are married jointly filing or an eligible widow(er) and have an AGI between $218,000 and $228,000
-
You are filing single or head of household and have an AGI between $138,000 and $153,000
-
You are married, file separately, do not live with your spouse and have an AGI between $138,000 and $153,000
Finally, the IRS is phasing out your ability to fully contribute to a Roth IRA once your income reaches certain limits.
Here are the Roth IRA income limits for 2023 that would reduce your contribution to zero:
-
You are married jointly filing or a qualified widow(er) with an AGI of $228,000 or more
-
You are single or head of household and have an AGI of $153,000 or more
-
You are married, file separately, do not live with your spouse and have an AGI of $153,000 or more
Remember that your ability to contribute to a Roth IRA is based on the AGI, which may not represent your actual earnings or take home pay. AGI is your gross income minus adjustments.
Gross income includes:
Income adjustments include:
-
Interest on student loans
-
Alimony
-
Contributions to a retirement account
-
Self-employment tax if you are self-employed
-
Health savings account contributions
In addition to determining whether you can contribute to a Roth IRA and how much you can contribute, your AGI is also used to determine your eligibility for other tax deductions and credits. For example, whether or not you can deduct paid medical expenses out of pocket depends on your AGI.
2023 Roth IRA Contribution Amounts Deposit Status Modified AGI Contribution Amount Joint Deposit Eligible Spouse or Widow(er) Less than $218,000 Up to Limit $218,000 – $227,999 Reduced Amount $228,000+ Zero Married Deposit separately (lived with your spouse during the year) Less than $10,000 Reduced amount $10,000 or more Zero Single, head of household or married filing separately (did not live with your spouse during the year) Less than 138,000 $ Up to the limit $138,000 – $152,999 Reduced amount $153,000 and more Zero When you earn too much to contribute to a Roth
If you can’t contribute to a Roth IRA because your income is too high, you can still contribute to a traditional IRA. And you can still contribute to a Roth IRA using a Roth conversion, also known as a Roth backdoor. A Roth conversion involves converting the assets of a non-deductible IRA (i.e. one to which you have not deducted contributions) into a Roth IRA. You will have to pay taxes on the converted amount for the tax year in which you transfer assets.
But in the future, you could make contributions to a Roth IRA and potentially enjoy significant tax benefits when it’s time to withdraw those assets later.
Roth IRA conversions can also make sense if you want to avoid the required minimum distributions from age 72. But it’s important to weigh the current tax costs to you against the future tax benefits to make sure it’s the right decision.
The essential
Roth IRAs are just one way to save for retirement, but they’re worth considering if you want to make tax-free withdrawals. Knowing the Roth IRA income limits and annual contribution limits can help you make the most of these accounts in your retirement planning strategy.
Tips for investing
-
Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three approved financial advisors who serve your area, and you can interview your advisor for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
-
During the retirement planning process, it is important to think about the tax laws of the state in which you wish to retire. By minimizing your retirement tax burden, you can maximize the value of your retirement savings.
Photo credit: ©iStock.com/Andrii Dodonov, ©iStock.com/LightFieldStudios, ©iStock.com/Piotrekswat
The post Roth IRA Income Limits for 2023 appeared first on SmartAsset Blog.