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2023 Roth IRA Rules: What You Need to Know

02.02.2023 by admin // 4 Comments

A Roth IRA is a type of individual retirement account that allows for tax-free withdrawals in retirement in the United States. In 2023, the contribution limit for a Roth IRA is $6,500 for those under the age of 50 and $7,500 for those 50 and over. There are many benefits to having a Roth IRA including no minimum distribution and no taxes on any gains. Contributions to a Roth IRA are made with after-tax dollars and qualified withdrawals, including earnings, are tax-free. There are income limitations for contributing to a Roth IRA, and early withdrawals may be subject to taxes and penalties. It’s important to understand Roth IRA rules and requirements in order to make informed decisions about saving for retirement.

What Is A Roth IRA

A Roth IRA is a retirement account that offers you a tax benefit when you retire. Unlike traditional IRAs and 401(k) plans Roth IRA contributions are not tax deductible but you also do not pay taxes when you withdraw money at age 59 ½ +.

Roth IRA Contribution Limits 2023

The 2023 Roth IRA contribution limit is $6,500 for the year. If you’re 50 or older you can contribute up to $7,500 for the year. These contribution limits increased by $500 compared to 2022. So, if you haven’t contributed to your Roth IRA in 2022 yet, you can still contribute up to $6,000 or $7,000 if you’re 50 or older before April 15th. The amount you contribute also cannot exceed what the IRA defines as “earned income” or taxable compensation. This includes wages, salaries, tips, commissions, professional fees and self-employment income. Charles Schwab shares more details here on what’s considered earned income for a Roth IRA.

The amount you contribute to a 401(k) plan does not impact the amount you can contribute to a Roth IRA but the amount you contribute to a Traditional IRA will affect the amount you can contribute to a Roth IRA. If you contribute to both a IRA and Roth IRA in the same year, the total contributions to both of these accounts cannot exceed $6,500 if you’re under 50, or $7,500 if you’re 50 or older.

Setting Up A Roth IRA For A Child

You can also set up a custodial Roth IRA for your child, subject to the same contribution limits outlined above. This means that contributions for your child’s Roth IRA you control cannot exceed what your child earned in 2023.

Roth IRA Income Limits 2023

There are income limits on Roth IRA eligibility which is why it’s important to start your contributions to a Roth IRA the first year you get a W-2. If you are single, and your modified AGI is $138,000 the amount you can contribute to a Roth IRA begins to phase out. You cannot contribute to a Roth IRA in 2023 as a single filer if you make more than $153,000.

If you are married filing jointly and your AGI is $218,000 or above the amount you’re eligible to contribute begins phasing out. If you are married filing jointly you cannot contribute to a Roth IRA if you make more than $228,000 in 2023. Once you exceed this income you will need to explore options to setup a backdoor Roth IRA if you’re interested in having a Roth IRA. To take full advantage of a Roth IRA, set up a Roth IRA when you first start collecting a paycheck. You never know when you may get to the point where your income makes you ineligible to contribute to a Roth IRA.

Here are the contribution limits by income and filing status for a Roth IRA in 2023:

roth ira rules 2023, roth ira 2023 contribution limit — Source: IRS

When Can You Contribute to a Roth IRA

Contributions to a Roth IRA can occur at anytime during the year. You may contribute the full amount all at once or contribute multiple times during the year up to the maximum. Once a new calendar year starts, you can still make contributions for the previous calendar year up until April 15th (when taxes are due). For example, you can make a contribution for 2022 to your Roth IRA until April 15, 2023.

Roth IRA Withdrawals

Since you’ve already paid taxes on your contributions, you can withdraw your contributions at any time with no restrictions. If you withdraw earnings on those contributions though, you may be taxed or penalized on withdrawing this money.

Roth IRA rules dictate that once you’re age 59 ½, as long as you’ve held the account for at least five years, you can take distributions on all money within the account and do not have to pay taxes on that money.

Roth IRA Minimum Required Distribution

With a Roth IRA there is no required minimum distribution. You don’t ever have to withdraw from this account if you don’t need to. Additionally, you can pass this money onto your heirs.

Unlocking the Potential of the Mega Backdoor Roth 401(k): A Comprehensive Overview

01.17.2023 by admin // Leave a Comment

A mega backdoor Roth 401(k) is a good tool for high-income individuals to save more money for retirement and reduce future taxes. It is called a “backdoor” Roth 401(k) because it allows individuals to contribute above the 401(k) limit – which is $22,500 in 2023. Through a mega backdoor Roth 401(k) you can contribute up to $66,000 in 2023 if you’re under 50 years of age. There are some important considerations to keep in mind when using this strategy. This includes whether or not the plan includes automatic conversions. Learn if this strategy of using a mega backdoor Roth 401(k) is right for you.

What is a Mega backdoor Roth 401(k)

A mega backdoor Roth 401(k) is a way to contribute additional funds to a 401(k). It involves making after-tax contributions to your 401(k) through your employer. It is a useful tool for high earners who want to take advantage of tax-free growth and the withdrawal benefits of a Roth retirement account and have already maxed out the pre-tax maximum of their 401(k). Because the tax is paid prior to the contribution, any earnings are tax free. These tax savings can really add up the earlier you leverage this tax strategy in your career.

How Much Can You Contribute to a Mega Backdoor Roth 401(k)

Every year, the IRS sets the employee pre-tax and Roth 401(k) contribution limits. The maximum combined amount you and your employer can put into a 401(k) in 2023 is $66,000 for under age 50. For over age 50, the maximum is $73,500 in 2023.

Does Your Mega Backdoor Roth 401(k) Plan Offer Automatic Conversions

When signing up for the mega backdoor Roth 401(k) through your employer, it is important to understand if the plan supports automatic conversions. This means that once new contributions are made to your after-tax account they are immediately converted to your Roth account. Though the contributions have already been taxed, any earnings from the contributions haven’t been taxed. An automatic conversion can reduce your tax liability on each conversion. This is because it eliminates the time the incoming money would be accruing taxable earnings. If your company does not offer this, you may have to do it manually and it could result in higher taxes. Converting any earnings to a Roth will trigger a tax bill in the year of the conversion. So, if you have to do a manual conversion you’ll want to do it the same day the contribution is made.

When Can You Start Withdrawing From a Roth 401(k)

As of 2023, the earliest you can withdraw from your 401(k) is 59 ½ years old without incurring a penalty. There are some exceptions to this rule. You may be able to take penalty-free withdrawals of your contributions at any time, as long as you held the account for at least 5 years. You can also withdraw 401(k) earnings if you meet these exceptions:

You become disabled
The funds are used for certain qualified higher education expenses
The funds are used to buy a first home (up to $10,000 lifetime limit)
The funds are used to pay for unreimbursed medical expenses that are more than 7.5% of your adjusted gross income
You use the funds to pay for health insurance premiums while you are receiving unemployment benefits

Laws do change, so it is always best to consult your accountant before you make any withdrawals of your Roth 401(k). These also are available for Roth 401(k) accounts and may not apply to other types of retirement accounts. If you do withdraw early, even following these exceptions, you will lose out on tax free future earnings.

Should You Contribute the Full Amount to a Mega Backdoor Roth 401(k)

Ultimately, how much you contribute to a Mega Backdoor Roth 401(k) depends on your situation. You may want to stay more liquid in your taxable accounts given the current economic uncertainty. Your 401(k) plan may not offer as many investment options as your Roth IRA. The tax savings now with a pre-tax 401(k) may also be more impactful than the tax savings realized 30 years from now. Or, you may have better investments available outside your 401(k) which outweigh any future tax savings. As you start earning more money though, your financial plans should be reassessed. It is a great time to consider to if the Mega Backdoor Roth 401(k) should be part of your retirement savings strategy.

How to Buy Treasury Bills at Charles Schwab

01.10.2023 by admin // Leave a Comment

After over a decade of low interest rates, Treasury bills are finally starting to look attractive. Treasury bills are some of the safest investments in the world, and as of January 2023, are paying over 4% interest.

So, how do you buy Treasury bills? You can buy Treasury bills at Treasury Direct and brokerages, including Charles Schwab. I already have an account at Charles Schwab, which is why I started looked into how to buy Treasury Bills with them, though other brokerages may be just as easy. Here is how I bought a 3 month Treasury Bill at Charles Schwab.

What is a Treasury bill

A Treasury bill, also known as a T-bill, is a short-term debt obligation issued by the U.S. government. Treasury bills have different maturity time frames including 3 month, 6 months, 9 months, a year and longer fixed timeframes. T-bills are sold at a discount to their face value. This means you will pay less than face value, and receive the interest + initial principle (face value) when the T-bill is redeemed at maturity. Treasury bills are considered some of the safest investments because they are backed by the U.S. government.

Why To Buy A Treasury Bill

Before we go into how to buy a Treasury bill, why should you buy a Treasury bill in the first place? Right now, there is a lot of uncertainty in the economy and stock indices have been in a downtrend. There are limits to how much you can invest in Series iBonds, and also a mandatory 1 year holding period w/ a 5 year mandatory holding period to avoid a 3 month interest penalty. With inflation expected to go down, the value of buying Series iBonds isn’t as simple. Though the interest rates in January 2023 are 6.89%, in 6 months it will likely be lower and potentially comparable to the interest Treasury bills offers. With the recent increase in Treasury Bill interest rates, there are options to make 4%+ interest. And, you don’t have to hold for long with the options to buy 8-week and 12-week Treasury Bills.

Additionally, while Treasury bills are taxed federally, they are except from state and local taxes.

How to Buy a Treasury Bill at Charles Schwab

To buy a Treasury bill at Charles Schwab you will need a brokerage account. If you do not have a brokerage account, go to Charles Schwab and click “Open an Account.” You’ll need provide personal and financial information as well as transfer funds after the account is open, and it usually takes a few days before the cash is available to trade or buy Treasury bills.

Once you have a brokerage account:

Log in and open the “Trading” tab
Click on the “Bonds” heading
On the “Bonds” page, scroll down to “U.S. Treasuries” and click the term you want to buy
Select the specific Treasury bill you wish to purchase and enter the desired quantity
Review and confirm the details of your order, including the price and any fees
Double check the price, as that will be the amount moved from your cash to the Treasury bill
Submit your order and wait for it to be processed. If the market is open, it will be processed that day. If the market is closed, it will be processed the next business day.
Once your order is complete, go to the “Accounts” tab, select “Positions” and scroll to “Fixed Income”. You will now see your Treasury bill there in your account.

How to Cash Out Your Treasury Bill On The Maturity Date

When a Treasury bill in a Charles Schwab brokerage account matures, the proceeds will automatically be credited to your in cash. No actions are needed to sell the Treasury bill or receive the proceeds.

The cash in your account will be the face value of the Treasury bill along with any accrued interest. If you hold the Treasury bill in a taxable brokerage account you will pay federal taxes on the earnings but are exempt from state and local tax. If you hold it in a retirement account like an IRA or Roth IRA, the tax rules will follow the tax rules for those accounts.

What Does Charles Schwab Charge to Buy A Treasury Bill

Pricing isn’t static, so be sure to check out https://www.schwab.com/fixed-income/pricing for the latest fees. As of January 4th, 2023 it is free to purchase online, and $25 if purchased broker assisted.

Why To Buy a Treasury bill at Charles Schwab vs Treasury Direct

When I started researching how to buy Treasury bills, I learned you could also buy directly with Treasury Direct. However, when I bought Series I-bonds on Treasury Direct I found the UI to be complex and a pain to log into my account. Since it is easy to log into Charles Schwab, and they also have an easy to use mobile app, I decided to buy through Charles Schwab.