When it comes to saving for retirement in a tax-advantaged manner, you have choices. You can put money into an employer-sponsored 401(k) if your company offers one. And if it doesn't, you can contribute to an IRA as long as you have earned income.
Now IRAs come in two varieties -- traditional and Roth. The upside of saving in a traditional IRA is getting an immediate tax break on the money you put. However, withdrawals are then taxable during retirement.
With a Roth IRA, there's no immediate tax break on contributions. But once you retire, you can enjoy tax-free withdrawals from that account. And at a time in life when money may be tighter, not having to worry about paying the IRS those taxes is a good thing.
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But there's a pitfall you might encounter on the road to funding a Roth IRA -- earning too much to qualify. Each year, the IRS sets income limits for Roth IRA contributions, and if you make too much, you can't contribute to a Roth IRA directly.
This doesn't mean a Roth IRA is off the table, because you can always fund a traditional IRA and convert it to a Roth after the fact. But if you'd rather go the more straightforward route, you'll need a certain income to qualify.
Next year, however, the income limits for Roth IRA contributions are going up. So even if you're a higher earner, you may have the option to fund one of these plans without having to go a circuitous route.
2023's Roth IRA income limits
The income limits for Roth IRA contributions hinge on your tax-filing status. If you're single and earn under $129,000 this year, you can make a full Roth IRA contribution. From there, contributions to a Roth IRA start to phase out and are barred once your income exceeds $144,000.
If you're married filing jointly and earn under $204,000 this year, you can make your full Roth IRA contribution. From there, contributions begin to phase out and are barred once your income surpasses the $214,000 mark.
Next year, the Roth IRA income limit for single tax-filers is rising to $138,000 for full contributions, and contributions will only be barred once your income exceeds $153,000. For married couples filing jointly, 2023's Roth IRA income limit is $218,000 for full contributions. And contributions are barred once your joint income exceeds $228,000.
You'll notice that these are sizable jumps from 2022's limits. And that means a lot more savers could be eligible for a Roth IRA in 2023.
Should you save in a Roth IRA?
Some people prefer to keep their money in a traditional IRA because of the up-front tax break. But Roth IRAs offer a number of benefits you shouldn't overlook.
For one thing, there's protection against tax rate increases. Right now, we know what the various IRS tax brackets look like. But we don't know how high tax rates will be 10, 20, 30 or 40 years down the line. If you keep your retirement savings in a Roth IRA, you'll effectively lock in your current tax rate on that money -- and avoid having to pay a higher tax rate on withdrawals.
Also, Roth IRAs are the only tax-advantaged retirement plan to not impose required minimum distributions. That gives you a lot more flexibility with your money. You can leave it to grow tax-free well into your retirement if you don't need to take withdrawals right away, and you can also gift a large chunk of that money to your heirs if that's a route you want to take.
All told, there are plenty of good reasons to make a Roth IRA your retirement savings' home. And even if you earned too much this year to contribute, that doesn't mean that option won't open up in 2023.
