Should You Fund a Roth IRA in 2023?

Roth IRAs are often hailed as the best retirement savings tool in existence. And it’s easy to see why.

With a Roth IRA, you get to enjoy tax-free investment gains in your account as well as tax-free withdrawals during retirement. And at a time in life when money may be tighter than you’d like it to be, not having to lose some of your income to the IRS is a very good thing.

Plus, Roth IRAs are the only tax-advantaged retirement savings plan to not impose required minimum distributions. That means you can leave your money where it is and enjoy added years of tax-free gains. Plus, if you’re in a strong enough financial position to be able to leave a large chunk of your nest egg to your heirs, a Roth IRA should allow for that — whereas you may not be able to do so with any other tax-advantaged retirement plan.

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Finally, saving in a Roth IRA could help you keep more of your Social Security income. Some seniors are subject to federal taxes on a portion of their benefits once their income reaches a certain threshold. But Roth IRA withdrawals don’t count in the formula used to determine whether Social Security benefits are taxable, so that gives seniors even more leeway.

But while Roth IRAs clearly have their benefits, you may want to consider a different retirement savings plan in 2023. Here’s why.

It’s a matter of tax savings

While Roth IRAs come with many benefits, they don’t give you a tax break on the money you put in. And if you expect to be in a high tax bracket next year — higher than what you’ll be in during retirement — then a Roth IRA may not make sense, because you’ll be taxed at a higher rate on the money you put in.

Plus, you might need the tax savings of a traditional retirement plan to in a position to max yours out for the year. If you lose that tax break by funding a Roth IRA, you not be able to max out (which, in 2023, means contributing $6,500 if you’re under age 50, or $7,500 if you’re 50 or older).

Finally, if you have access to an employer-sponsored 401(k) plan with a generous matching program, then funding that account could make more sense if it results in a lot of free money. So, let’s say you can only afford to contribute $7,500 for retirement savings purposes and your company will actually give you a dollar-for-dollar match on your first $7,500 in 401(k) contributions. In that case, skipping the Roth IRA and going with the 401(k) could mean getting an extra $7,500.

Think things through

It’s clear that there’s much to be gained by funding a Roth IRA. But before you decide to house your retirement savings in one next year, think about whether that makes sense from a tax and financial standpoint. And also, make sure your employer isn’t offering a better deal in its 401(k) plan.

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