Although not as well-known as a traditional IRA, contributing to a Roth IRA is a solid retirement savings idea. Because the money going into your Roth IRA is contributed after taxes, distributions will be tax-free in retirement. If you follow the Roth IRA withdrawal rules, this tax-free status will apply to both your contribution amounts and any investment growth you may have experienced.
Not only can this be a hedge against potentially high tax rates during your retirement but also, because the distributions aren’t counted by the IRS as income, it may enable you to keep your entire income in a lower tax bracket. This can save you money in Social Security taxes and Medicare premiums (which increase at higher income levels).
However, you first have to figure out if you are eligible to contribute to a Roth IRA, and the rules for Roth IRA income limits are a bit complex.
Roth IRA income limits and maximum contributions
| Roth IRA income requirements for 2023 | ||
|---|---|---|
| Single Individuals | < $138,000 | $6,500 |
| ≥ $138,000 but < $153,000 | Partial contribution (calculate) | |
| ≥ $153,000 | Not eligible | |
| Married (filing joint returns) | < $218,000 | $6,500 |
| ≥ $218,000 but < $228,000 | Partial contribution (calculate) | |
| ≥ $228,000 | Not eligible | |
| Married (filing separately)* | < $10,000 | Partial contribution (calculate) |
| ≥ $10,000 | Not eligible | |
Source: https://www.fidelity.com/learning-center/smart-money/roth-ira-contribution-limits
The figures for “married filing separately” are not mistakes. If you live with your spouse at any time during the tax year and file separately, the IRS severely limits the amount you can contribute to a Roth IRA account. However, in this situation, the IRS does allow you higher tax-deductible contributions to a traditional IRA, so that is a possible alternative.
Roth vs. traditional IRAs – same contribution limits, different rules
The contribution limits in the chart are the totals that you can contribute to any type of IRA in a year. You could contribute all of it to a Roth IRA, all of it to a traditional IRA or split your contributions among them. The primary benefit of a Traditional IRA is that earnings in the account, if any, grow on a tax-deferred basis. In addition, with a traditional IRA, there are no income restrictions if you don’t have a work-sponsored retirement plan.
What is and is not “income”
To contribute to a Roth IRA, you must make “earned income” during the tax year. Earned income is money paid for work you performed or profit distributions from a small business. It includes wages, salaries, tips, bonuses, commissions, and self-employment income. It also includes some less-common items, like scholarships and fellowships, jury duty pay and accrued vacation payments.
Earned income does not include interest and dividends from investments, income from rental property, pension payments, Social Security payments, or IRA distributions.
All of the Roth IRA income limits in the chart refer to modified adjusted gross income. To figure your modified adjusted gross income, use Appendix B, Worksheet 2, from IRS Publication 590-A to modify the adjusted gross income (AGI) from your tax return for Roth IRA purposes. Or ask your tax advisor for assistance.
Special circumstances for Roth IRA contributions
There are additional rules that may affect whether you are eligible for a Roth IRA or how much you can contribute:
- You can’t contribute more than your earned income for the year. If your earned income is $3,000, your cap on Roth IRA contributions is also $3,000.
- However, a nonworking spouse can contribute to an IRA based on the taxable compensation of the working spouse.
- Individuals age 50 and over can contribute up to $1,000 extra per year to “catch up,” for a maximum total of $7,500.
Learn the rules to live the life you want
There are rules governing not just Roth IRAs but all types of savings and investment account types. What’s important to know is how these rules apply to your situation and what combination may be best for you right now.
At United Capital Financial Advisors, we believe it’s not just about money – it’s about your entire life. Money is just fuel for living the life you want, which means something different for each person.
Every individual has different intentions, goals, preferences, strengths, and priorities, as well as different trade-offs they are willing to make. Our advisors want to understand yours thoroughly before they design a financial plan for you.
