2023 Roth IRA and Traditional IRA Contribution Limits, #193
As we get closer to the tax filing deadline (April 15th), I wanted to talk about contributing to a Roth IRA or traditional IRA. In this episode, I’ll cover contribution and deduction limits, spousal IRAs, and non-deductible IRA contributions (and why you’d want to consider them).
You will want to hear this episode if you are interested in...
[1:16] Sign up for Retirement Readiness Review!
[1:49] Traditional IRA contributions/deductions
[6:45] Roth IRA contribution limits
[9:02] The spousal IRA
[10:22] Non-deductible IRA contributions
Traditional and Roth IRA basics
Everyone with earned income can contribute to an IRA or Roth IRA (up until the filing deadline). Earned income includes wages, salaries, tips, and net self-employed income. Your spouse can contribute on your behalf if you don’t have earned income.
The max you can contribute is $6,500 (if under 50) or $7,500 (if over 50). You can split the money between a traditional or Roth IRA. If you’re looking for an additional tax deduction, you can contribute to a traditional IRA and get a tax deduction equal to the amount you contribute.
Do you have a retirement plan through your work (401K, 403B, 457 plan, etc.)? If you do, you have to look at your modified adjusted gross income (MAGI) to determine if you qualify to contribute. If you don’t have a plan through work, you can contribute the full amount.
With a Roth IRA, you don’t get a tax deduction on your contributions. But when you withdraw the money, the withdrawals are tax-free. To contribute to a Roth IRA, your MAGI must also be under certain limits.
I’ve linked documents in the resources that detail what each of those limits looks like for each filing status.
Non-deductible IRA contribution
What is a non-deductible IRA contribution? It’s where you make a contribution to a traditional IRA up to the limit of $6,500/$7,500 but you don’t get a deduction on the contribution. Why would you want to do that?
If you want to pursue a backdoor Roth IRA. If you don’t have an IRA, SEP IRA, or Simple IRA money in your name at the end of 2023, you’d open a traditional and Roth IRA at the same company. You’d contribute to the traditional IRA for 2023. Then you move the money over to the Roth IRA (a tax-free conversion).
If you can’t do a backdoor Roth IRA, you can benefit from the tax deferral of a traditional IRA. Any taxes on the increase in value are deferred. You’ll pay tax on the gains when you make a withdrawal (but never on the principal). If you invested the money in a brokerage account, you’d have to pay taxes on an annual basis on any dividends, interest, or capital gains.
If you have a 401K through your company, you can roll the after-tax monetary gains to a traditional 401K (separating the contributions from your gains) and convert the contributions to a Roth IRA (similar to a backdoor Roth IRA).
What makes the most sense for you in 2023? Listen to learn more about each of the options.
Resources Mentioned
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