Roth IRA Contributions Are Increasing in 2023. Should You Add More to Your Account?

Want to put more money into your Roth IRA? Starting next year, you can!

Are you thinking of adding more money to your Roth IRA account in 2023? If so, you're not alone. Many people are taking advantage of the increased contribution limits for Roth IRAs that will go into effect in 2023. Before you start adding more money to your account, though, it's important to be aware of the finer details and understand how this change could affect your retirement planning.

What are the changes?

The new law increases the maximum annual contribution limits for all types of retirement accounts, including Roth IRAs. The current limit is $6,000 per year for individuals under age 50. But in 2023, this limit will increase to $6,500 annually. For those over age 50, the limit will increase from $7,000 a year to $7,500 annually starting in 2023.

Should you invest more money?

It may seem like an easy call -- if there's more room to contribute money into your Roth IRA account each year, why not do it? But depending on your financial situation and goals for retirement, investing more money may not make sense for you. When you contribute to a Roth IRA, you will not be able to withdraw your Roth earnings until you are at least 59 1/2 years old. It also must be at least five years since you first contributed to your Roth.

It's important to consider taxes when making the decision about whether or not to invest more money into your Roth IRA account. Contributions made to a Roth IRA are taxed upfront at your current tax rate but grow tax free. If you think your tax rate might be higher in retirement, then contributing more now could save you from paying higher taxes later on down the road. However, if you want the tax deduction upfront and believe your tax rate will be lower in retirement, then you may want to consider investing in a traditional IRA. The contribution limits are the same for both a Roth and traditional IRA.

Income limits

Another aspect to consider is how much money you currently earn. Unlike traditional IRAs, if you make more than a certain amount, you will not be eligible to contribute to a Roth. For 2023, the modified adjusted gross income (MAGI) limit starts at $218,000 for those married and filing jointly. For those who file single, head of household, or married but filing separately, the MAGI limit starts at $138,000. If your income disqualifies you from contributing to a Roth IRA, you can still invest for retirement through other accounts such as a traditional IRA or a workplace retirement account like a 401(k).

Ultimately, whether to add more to one's Roth IRA account depends on individual circumstances. However, with the increasing contribution limits set to take effect in 2023, it may be wise for some individuals to begin or increase their contributions if possible. Consider all aspects of your financial situation and goals carefully before making any decisions about funding your retirement account. With careful planning and wise investments now, you can set yourself up for success and less financial stress come retirement.