Higher 2023 IRA and Roth IRA Contribution Limits and Phase Outs:
If you are planning to save for your retirement, you may want to consider opening an Individual Retirement Account (IRA) or a Roth IRA. These are tax-advantaged accounts that allow you to invest your money for the long term. However, there are some rules and limits that you need to be aware of before you contribute to these accounts. We will explain the differences between IRA and Roth IRA, the contribution limits and phase outs for 2023, and some tips on how to maximize your retirement savings.
What is an IRA?
An IRA is a type of retirement account that allows you to save money and defer taxes until you withdraw it in retirement. You can choose from different types of IRAs, such as traditional IRA, SEP IRA, SIMPLE IRA, or self-directed IRA, depending on your eligibility.
The main benefit of an IRA is that you can deduct your contributions from your taxable income, reducing your tax bill for the year. However, you will have to pay income tax on your withdrawals in retirement, based on tax brackets at that time.
What is a Roth IRA?
A Roth IRA, named after Sen. William Roth from Delaware, is another type of retirement account that allows you to save money and enjoy tax-free growth and withdrawals. Unlike an IRA, you don’t deduct your contributions from your taxable income, meaning you pay taxes upfront. However, you can withdraw your money tax-free in retirement, as long as you meet certain rules. The main benefit of a Roth IRA is that you can avoid paying taxes on your investment earnings and withdrawals, which can be significant over time. However, not everyone is eligible to contribute to a Roth IRA, as there are income limits and phase outs that apply.
What are the contribution limits and phase outs for 2023?
The contribution limit is the maximum amount of money that you can put into your IRA or Roth IRA each year. The contribution limit for 2023 is $6,500 for individuals under 50 years old, and $7,000 for individuals 50 years old or older. These limits are the same as in 2022.
The phase out is the range of income that reduces or eliminates your eligibility to contribute to a Roth IRA or deduct your contributions to a traditional IRA. The phase out depends on your modified adjusted gross income (MAGI) and your filing status.
For 2023, the phase out ranges for Roth IRA contributions are:
– $138,000 to $153,000 for single filers and heads of household
– $218,000 to $228,000 for married couples filing jointly
– $0 to $10,000 for married couples filing separately
For 2023, the phase out ranges for traditional IRA deductions are:
– $73,000 to $83,000 for single filers and heads of household who are covered by a workplace retirement plan
– $116,000 to $136,000 for married couples filing jointly who are both covered by a workplace retirement plan
– $0 to $10,000 for married couples filing separately who are both covered by a workplace retirement plan
– $218,000 to $228,000 for married couples filing jointly where one spouse is covered by a workplace retirement plan and the other is not
If your income falls within the phase out range, you can still contribute to an IRA or a Roth IRA, but only partially. If your income exceeds the phase out range, you cannot contribute to a Roth IRA or deduct your contributions to a traditional IRA at all.
How to maximize your retirement savings?
If you want to make the most of your retirement savings, here are some tips that you can follow:
– Start saving early and consistently. The sooner you start saving for retirement, the more time your money has to grow and compound. Try to save at least 10% to 15% of your income each year for retirement.
– Choose the right type of account for your situation. Depending on your income level, tax bracket, and retirement goals, you may prefer an IRA or a Roth IRA. You can also have both types of accounts and split your contributions between them.
– Take advantage of employer matching contributions. If you have access to a workplace retirement plan such as a 401(k), a 403(b), or a 457, make sure to contribute enough to get the full match from your employer. This is free money that can boost your retirement savings significantly.
– Diversify your investments. Don’t put all your eggs in one basket. Invest in a mix of stocks, bonds, ETFs, and other assets that suit your risk tolerance and time horizon. This can help you reduce volatility and increase returns over time.
– Rebalance your portfolio periodically. Work with your financial advisor or our team at Robinswood to gain some insight.