November 17, 2022
The high rate of inflation this year has triggered an increase in how much you will be allowed to save in an IRA in 2023.
The new 2023 IRA limits:
$6,500 if you are younger than 50. Up from $6,000 this year.
$7,500 if you are at least 50. Up from $7,000 this year.
I would be thrilled if you gave serious thought to how you might be able to make a maximum contribution in 2023. If you’re under 50 that works out to $542 a month, or $125 a week. If you are at least 50, that works out to $625 a month, or $144 a week.
Higher Income Limits to Be Eligible to Save in a Roth IRA
You know that I think a Roth IRA is a great way to save for retirement. We’ll review why in a minute. But first I want you to know that in 2023 the income limits for Roth IRA eligibility are rising. That means more of you may be able to contribute.
Individuals with modified gross income below $138,000 will be able to make a full contribution to a Roth IRA in 2023.
If you are married and file a joint tax return with a modified gross income below $218,000 you both will be able to make a full contribution to a Roth IRA in 2023.
You can make a reduced contribution if you’re single and your income is between $138,000-$153,000, and if you’re married with an income between $218,000-$228,000.
Quick Suze School: Why I Think Roths Are the Way to Go
There are two types of IRAs: A Traditional IRA and a Roth IRA. Both give you a big tax break, and both require you to pay taxes. The only difference is when you get your tax break and when you pay your tax bill.
The money you contribute today comes from your after-tax income. That means you are paying your IRA tax right at the start because you’re contributing dollars you have already paid tax on.
While the money is inside your Roth IRA you owe no tax.
In retirement you get your big tax break: any withdrawals you make will be 100% tax-free. Yes, tax-free. And it’s up to you if, when, and how much you withdraw from your Roth IRA in retirement. There are no annual required minimum distributions (RMDs) with a Roth IRA. That gives you the flexibility to keep the money growing until you need it, or pass it along to heirs.
The money you contribute to a Traditional IRA can be claimed as a tax deduction in the tax year you make the contribution, up to certain income limits. That means you get your tax break upfront.
While the money is inside your Traditional IRA you owe no tax.
In retirement, every penny of your withdrawals will be taxed as ordinary income. Because you didn’t pay your tax bill upfront (as with a Roth), your tax bill comes at the end: you must make withdrawals so the IRS can collect tax. You must make annual required minimum distributions (RMDs) from Traditional IRAs starting at age 72. You can always withdraw more than your RMD. But not less.
None of us know where tax rates will be in retirement, whether that’s five years from now or 30 years from now. But I can tell you that current income tax rates are near historic lows. Again, I have no crystal ball, but if you told me sometime in the future rates might be higher, I wouldn’t be surprised. When you save in a Roth IRA you don’t need to worry about where future tax rates may be. Again, all withdrawals will be tax-free.
There’s also some extra emergency flexibility with a Roth IRA that I think can bring you peace of mind today.
You can always withdraw the money you contributed to a Roth IRA without owing any tax or penalty. The only time you would be hit with tax and potentially a 10% early withdrawal penalty is if you withdraw any earnings from the account. If you make an early withdrawal from a Traditional IRA you will owe income tax, and potentially a 10% penalty.
I want to be very, very clear: I hope you will never need to touch your retirement savings before retirement. And I very much want you to work on building a separate emergency savings fund, so you don’t need to raid your retirement account early. But I think it is important to understand that in a true financial emergency, you could tap part of your Roth IRA (your contribution) without any tax or penalty.