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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

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.

Maximizing Your 401(k) Contributions in 2023: The Benefits and How To Do It

12.28.2022 by admin // 4 Comments

A 401(k) plan is a retirement savings plan sponsored by employers that allows employees to contribute to their retirement savings pre-tax. If you can, you should always max out your 401(k) plan. The 401(k) contribution limit for 2023 is $22,500, an increase of $2,000 from 2022. 401(k) plans have many benefits including tax benefits, employee company match and accelerating funding your retirement. Maxing out your 401(k) every year, or contributing up to the contribution limit, enables you to take full advantage of all of these benefits. Even if you’re not sure how you’ll be able to afford contributing $22,500 to your 401(k) in 2023 there are steps you can take throughout the year to get closer to this goal.

When to Plan Your 401(k) Contributions

The beginning of the year is the best time to plan 401(k) contributions for the year. This way, you can spread out your contributions evenly throughout the year. The amount taken out per paycheck will be consistent that way. However, if you do hit the maximum amount early you’ll get a nice surprise of extra money in your take home pay at the end of the year as well as extra money taken out for taxes. If you wait until later in the year to plan your 401(k) contributions it may not be financially feasible. You’ll have to contribute more per paycheck to hit the max, or you may not earn enough the rest of the year to hit $22,500 in contributions. Don’t forget to check your 401(k) in the summer to ensure your contributions are on track to max out your 401(k) this year.

If you are short on cash this year, or are concerned about liquidity use these tips to get more cash quickly before you decide to cut your 401(k) contributions.

Make Sure To Always Get the Company 401(k) Match

Does your company automatically enroll you into their 401(k) plan? If not, make sure you sign up! Most companies that offer a 401(k) plan also offer a company match. At minimum, you should always contribute enough to your 401(k) to get the full company match. This is free money! The 401(k) company match is one of the top benefits of a 401(k) plan.

It’s hard when you first graduate college and starting from scratch- all the fees with the first apartment, first furniture buys, starting those student loan payments, etc. You may also have to save for bigger purchases like a house down payment and a car. It’s easy to feel like there is just no money to save for retirement.

Instead, look at how you are spending your money and find a way to contribute enough so you get the full company 401(k) match. After that, there are strategies to increase your contributions without feeling like you now have less money to spend over time.

Increase Your 401(k) Contributions During Raises and Promotions

Every time you get a raise or promotion you could afford to increase your 401(k) contribution more. Most companies have an annual raise cycle and if you’ve set your 401(k) contributions to a percentage of your salary your contributions will automatically increase when you get your raise. This time of year is also a great time to increase the percentage you contribute. You have already learned to live on your previous salary, do you desperately need that increase to buy more stuff? If you get a $5,000 raise you can increase your contributions by $1,000 a year and still have $4,000 of your raise. You won’t miss that last $1,000 while you’re adjusting to the extra $4,000 you are now earning every year. Using the table below, you can take the annual amount and divide it by the amount of paychecks per year to get the amount withheld out of each paycheck.

Increase Your 401(k) Contributions When You Finish Paying A Big Expense

Whether it’s putting down your first down payment, or paying off your last student loan, you now have one less expense. Reallocate what you would have spend on that expense to your 401(k) contributions. You won’t miss having the “extra” money because you didn’t have it before.

Enroll In The 401(k) Annual Increase Program

Some plans offer an annual increase program where you can establish annual increases. It depends on the plan, but at least some Fidelity plans allow 401(k) contributions to increase 1% or more each year automatically. You have the ability to align it to pay increases as well and then just set it and forget it. Automating 401(k) contribution increases is the easiest way to increase your contributions. If you end up needing more cash every paycheck you can always go online to your 401(k) plan provider website and reduce your contributions.

401(k) Tax Benefits

Have you ever done the math as to how much you’re saving in taxes by contributing to your 401(k)? You may think you can’t contribute anymore but don’t forget you’ll also save money on taxes.

If you contribute $22,500 to your 401(k) in 2023 here are the tax savings you can expect. These tax savings are based on the 2023 federal tax brackets. For example, you are single and making $205,000 a year you’ll avoid $7,200 in federal income taxes. Contributing the maximum amount to your 401(k) through pre-tax contributions really helps you save a decent amount of money every year.

The additional 1% contribution assumes the mean of the income bracket.

401k contributions in 2023 tax savings for single filers — 401k Contributions in 2023 Tax Savings for Single Filers

401k contributions in 2023 tax savings for married filing jointly filers — 401k Contributions in 2023 Tax Savings for Married Filing Jointly Filers

401(k) Benefits Include Compound Interest

If you need a little more motivation to max out your 401(k) don’t forget about compound interest. The hardest time to contribute to your 401(k) is when you’re young. When you’re young, you have a lot of big expenses on the horizon and a starter income. But, thanks to compounding, the more you save early on the less you’ll need to save later. Take this example from the team at J.P. Morgan Asset Management in their 2014 “Guide to Retirement.” Here, they share how much money you can make from investing $5,000 a year over time depending on when you start.

Compounding interest graph showing how much you will make from investing $50,000 over time. — Example of Compounding from J.P. Morgan Asset Management 2014 Guide to Retirement

Don’t forget, a 401(k) is one of several options to save for retirement. After you’ve hit your employee match in your 401(k) plan, it’s good to start contributing to your Roth IRA account. This way, you can fully optimize the tax benefits in your retirement savings strategy. Then, contribute the rest to max your 401(k) contributions.

Benefits of a Roth IRA

08.26.2019 by admin // 2 Comments

There are several retirement account options available in the United States including Traditional IRAs, Roth IRAs and 401(k) plans. Even if you already contribute to a 401(k) plan at work, there are many benefits unique to a Roth IRA. You should contribute to a Roth IRA as part of your retirement savings strategy.

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 +. There are certain Roth IRA rules such as income requirements and contribution limits you need to follow.

Broad Variety of Roth IRA Investment Options

In a Roth IRA account you can select what you want to invest in such as stocks, bonds and mutual funds. You can invest in nearly any financial asset but you cannot invest in other assets like artwork for example. Any financial asset offered by the financial institution you have your Roth IRA with can be invested in through your Roth IRA. This is a benefit offered by a Roth IRA that you don’t have in your 401(k) plan. A 401(k) plan offered by your employer typically only has a few options of what you can invest in.

Roth IRA Tax Benefits

Roth IRAs are funded with post tax contributions. This means you pay taxes on your Roth IRA contributions before you put it in the account. This is different from a 401(k) plan where you contribute money that hasn’t been taxed yet. Once the money is in your Roth IRA account the earnings grow tax free.

Borrowing Money from Roth IRA Earnings

It’s not recommended that you borrow money from a Roth IRA. However, if you get in a bind, there are a few benefits to taking out a loan / distribution from a Roth IRA. With a Roth IRA, you may have to pay a 10% penalty for an early withdrawal but there are a few exceptions. You can withdraw all or part of your money penalty free for 60 days as part of a Roth IRA rollover but you must pay back the full amount in that time frame.

You can also request a qualified distribution that you don’t have to pay back for a few reasons including buying or building your first home (up to $10,000 cap), certain education expenses or if you become disabled. Investopedia shares more details here about withdrawing from a Roth IRA. If this is something you are considering, it is best to contact your financial institution first. However, when you withdraw money from your Roth IRA you lose the tax benefits of those contributions earning capital gains and dividends tax free.

With a 401(k) loan, you can only take a loan out for a current 401(k) plan. You also may have to pay taxes on your loan and interest which is typically an interest point or two above the prime rate. Your loan is also limited to $50,000 or 50% of your balance, whichever is lower.

Roth IRA Contribution Withdrawals At Any Time

With a Roth IRA you are always able to withdraw your contributions penalty free (note: contributions, not earnings). You’ve already paid taxes on your Roth IRA contributions. Therefore, 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.

Once you hit 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. Both 401(k) plans and Traditional IRA plans require you to pay taxes when you withdraw the money.

No Minimum Required Distribution for Roth IRAs

There are no required minimum distributions for Roth IRA accounts. Both 401(k) plans and Traditional IRA plans have required minimum distributions beginning at age 70 ½. If these plans are your only retirement saving strategy this could mean you’re in a high tax bracket depending what your required minimum distribution is. You don’t have the option to withdraw less to end up in a lower tax bracket. Since there is no required minimum distribution beginning at 70 ½ with a Roth IRA you don’t ever have to withdraw from this account. You can opt to pass this money onto your heirs.

Roth IRA Benefits Summary

It is a good retirement strategy to have a Roth IRA along with a 401(k) or traditional IRA to reduce the amount of taxes you’ll have to pay once retired and also to take advantage of the tax benefits offered by a 401(k) plan while you’re working. Having a mix of both will help reduce your taxes both now and in retirement. You’ll also have more flexibility with investment options and flexibility to borrow money from the account if you’re ever in a desperate situation.