An individual retirement account (IRA) is a great way to save and invest for retirement. Because they are not sponsored by employers, IRAs are popular with self-employed people. It’s also possible to have both an employer-sponsored retirement account—like a 401(k)—and an IRA at the same time.
If you’re considering opening an IRA, or if you already have one, it’s important to know the IRA contribution limits for 2023. This will allow you to contribute as much as possible to your account.
Income and Contribution Limits for Roth IRAs
Roth IRAs are popular with many because contributions are made with after-tax dollars. This just means the money you contribute to your account has already been taxed. When you’re ready to start making withdrawals, you don’t have to pay any additional taxes on the money you take out.
Many people prefer this arrangement because they know their incomes will be lower when they retire. They may not want to have to deal with the burden of paying taxes on their retirement income when they will have less money to live on.
To qualify for a Roth IRA, you have to meet certain income requirements, which are based on your tax filing status and your modified adjusted gross income (MAGI). If your tax filing status is single, you can earn up to $138,000 to contribute the full amount allowed in 2023.
After this, the amount you can contribute decreases (the phase-out period) until your earnings reach $153,000.
If your tax filing status is married and you are filing jointly, you can earn up to $218,000 to contribute the full amount allowed in 2023. After this, the amount you can contribute decreases (the phase-out period) until your earnings reach $228,000.
Just as there are earnings limitations with Roth IRAs, there are also annual contribution limits. For 2023, you can contribute up to $6,500 if you are under 50 years old, and up to $7,500 if you are 50 and older.
Income and Contribution Limits for Traditional IRAs
Traditional IRAs are tax-deferred retirement accounts. Your contributions may be tax deductible, earnings are tax free, and you don’t pay taxes until you make withdrawals. Unlike Roth IRAs, there are no income restrictions to contribute to traditional IRAs.
The amount that you can contribute to a traditional IRA is the same as a Roth IRA. For 2023, you can contribute up to $6,500 if you are under 50 years old and up to $7,500 if you are 50 and older.
IRA Tax Deduction Limits
One of the many benefits of contributing to an IRA is that the contributions you make each year may be tax-deductible, depending on the type of IRA you have. Because the tax code changes each year, be sure to consult with a tax professional before taking any deductions.
Traditional IRA Deduction Limits
If your employer (or your spouse’s employer if you’re married) doesn’t offer a retirement plan, like a 401(k), you can deduct the full amount of your annual IRA contribution from your taxes. If you or your spouse do have an employer-sponsored retirement plan, however, the contribution amount you can deduct from your taxes will depend on your MAGI.
Roth IRA Deduction Limits
Unlike traditional IRAs, the contributions made each year to Roth IRAs are not tax-deductible. This is because contributions to these accounts are made with after-tax dollars.
You may be able to qualify for the Saver’s Credit, however. This credit is available to those who fall below certain income thresholds and contribute to either an IRA or employer-sponsored retirement plan.
The amount of the credit varies depending on how much you contribute and your MAGI. If you are single, the maximum Saver’s Credit is $1,000 and is $2,000 if you are married and filing jointly.
Exceptions to the Contribution Limits
There are three important exceptions to the annual contribution limits. It’s important to see if any of these exceptions apply to you so that you can contribute as much as possible each year to your account.
Contributions Are Limited to Your Earnings
The amount you can contribute to an IRA can’t exceed your annual earnings. If you’re single and earn less than the $6,500 contribution limit in 2023, your contribution can’t exceed the amount of your taxable income. If your 2023 taxable income is $3,000, for example, $3,000 is the maximum that you can contribute.
Nonworking Spouses May Qualify for Spousal IRAs
Many nonworking spouses assume that they can’t participate in a retirement account because they don’t have earned income. However, they may be able to have spousal IRAs as long as their spouses earn enough money to cover the additional accounts. You’ll have to file a joint return to qualify.
There Is No Limit on Rollover Contributions
Some people convert their 401(k) plans from previous employers or other retirement plans into IRAs. If you decide to do this, there’s no contribution limit on account rollovers to IRAs.
What Happens When You Exceed the Contribution Limits?
If you accidentally contribute more than the allowed amount to an IRA, you will be assessed a 6% tax for the year on the additional money in your account. It’s possible to avoid the tax, however, by taking out the additional contributions (and any earnings) before the tax filing deadline.
That said, by removing the additional contributions and earnings from your account, you may still be liable for income taxes on the earnings. You may also be assessed an early withdrawal penalty.
IRAs With Jeanne D’Arc Credit Union
It’s never too early to start saving for retirement. The sooner you start investing in an IRA, the more time your account will have to grow through the power of compounding interest.
If you’re thinking about opening an IRA, Jeanne D’Arc Credit Union offers both traditional and Roth IRAs. Setting up an account is quick and easy. It just takes a few minutes of your time to start investing for your retirement years.
Click on the following link to learn more about our IRAs.