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It’s easy to overlook Roth IRAs as one of the most important elements of a successful financial plan for retirement. Most people prefer to use traditional IRAs because you can get an immediate tax break that saves you money on your current-year tax bill.
However, Roth IRAs have a key element that sets them apart from most tax-favored accounts: As long as you follow the rules, you can make withdrawals of Roth IRA money tax-free in retirement, circumventing potentially thousands of dollars in taxes.
The IRS just announced increases in the amount that investors can put into a Roth IRA in 2023, potentially boosting the value of this benefit. Yet one problem with Roth IRAs is that if your income is too high, you’re not allowed to make a full Roth IRA contribution. Below, you’ll learn more about both provisions.
Higher limits for Roth contributions in 2023
High inflation during 2022 led the IRS to increase the 2023 Roth contribution limits. If you’ll be younger than 50 throughout 2023, then your contribution limit will be $6,500, up $500 from 2022. Those who are 50 or older by the end of 2023 will have a higher $7,500 contribution limit, compared to $7,000 in 2022.
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As with regular IRAs, you have to have earned income in order to contribute to a Roth IRA. Moreover, if your earned income is less than the maximum yearly limit, you’re limited to the amount of income you earned.
Why your contribution could get cut
In addition, high-income taxpayers are sometimes limited from making direct contributions to a Roth IRA. If your modified adjusted gross income is a lower threshold, then your allowed contribution amount will get smaller. Once it reaches an upper threshold, no Roth contributions are allowed at all. You’ll find those limits below.
For This Filing Status:
Contributions Are Reduced If Income Is Above This Amount
No Contribution Is Allowed If Income Exceeds This Amount
Single, head of household, or married filing separately IF you didn’t live with your spouse during the year
$138,000
$153,000
Married filing jointly or qualifying widow or widower
$218,000
$228,000
Married filing separately IF you lived with your spouse at any point during the year
$0
$10,000
Data source: IRS.
Those numbers are up considerably from where they were in 2022. Singles will be able to earn $9,000 more in 2023 than they could the year before. Joint filers get an even larger $14,000 boost.
One area in which you can get tripped up is in understanding what modified adjusted gross income means. It includes most types of income and lets you take certain deductions. Most importantly, however, it doesn’t include any income you recognized from converting a traditional retirement account to a Roth. That can be especially useful, as you’ll see below.
What if you’re over the limits?
How much you’re over the income limits will determine how big a reduction you’ll see in your allowed contribution. Those above the upper threshold can’t contribute to a Roth at all. Those below the lower threshold can make a full contribution.
If you’re in-between, you’ll be allowed to contribute a proportional part of the overall limit. For instance, if you’re halfway between the two income figures, you’ll be able to contribute half of your $6,500 or $7,500 limit — $3,250 or $3,750. As you approach the upper end, your allowed contribution will drop, while those closer to the lower end will end up closer to getting a full contribution.
The backdoor Roth
There’s a way around the income limits for Roth contributions under current law. If you first contribute to a traditional IRA and then convert that money to a Roth, you won’t have fallen afoul of any rules under current law. However, if you already have a traditional IRA, then the conversion can sometimes result in extra tax liability.
Put the power of Roth IRAs to work for you
Being able to withdraw money in retirement on a tax-free basis is huge. That makes it more important than ever to have a Roth IRA — especially once the limits go up in 2023.
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