It’s never too early to start planning for retirement. In fact, if you’re working, regardless of how young you are, you should have a retirement account. Having a retirement account brings peace of mind for later years in life. How enjoyable your retirement will be is based on how comfortable you can live. Retirement can be great if you have the money you need to live as free as you want. If not, it can be extremely stressful. You may even have to go back to work to make ends meet. So, we bring you good news to all who are actively saving for retirement or have a Roth Individual Retirement Account (IRA).
An IRA is an investment account that helps people save for retirement with tax breaks. Anyone who earns income can open an IRA account, as there are multiple types. The two most common types are Roth IRA and traditional IRA. The IRS recently increased contribution limits for Roth IRAs for 2023. Read on to learn how this affects you.
Why Should This Matter To You?
If you want to live comfortably in your retirement years, this definitely matters to you. First, opening a Roth IRA is a perfect door to establishing a retirement plan if you don’t already have one in place. Second, a Roth IRA also provides tax-free income in retirement. Thirdly, if you currently have a Roth IRA, you should be aware of the increases to know your limits and ascertain just how much your assets can grow following the Roth IRA rules and regulations.
What Are The Increases?
In 2022, the maximum allowable contribution to a Roth IRA was $6,000, but in 2023, that amount has increased to $6,500 for those younger than 50. For those aged 50 and over, the limit has increased from $7,000 to $7.500, allowing everyone a $500 increase.
Should You Take Advantage of the Increase?
This may seem like a no-brainer, but before diving straight in and upping your annual contribution, here are some things to consider:
- Can you invest more money now based on your current financial situation?
- Can you invest more money toward retirement based on your current financial goals?
- Will investing more towards your retirement pull you further away from your goals?
- If you put all your eggs in one bucket, remember that you won’t be able to withdraw from your Roth earnings until you’re at least 59 ½ years old, or you risk losing money in penalties. So, consider your financial needs and the money you can access.
- Will your tax rate be higher in retirement? If so, remember that Roth IRAs are taxed upfront and grow tax-free. But if you think your rate may be higher in retirement, contributing more now could save you from paying higher taxes later.
- If you think your retirement tax rate will be lower and you want the tax deduction upfront, you may want to consider paying into a traditional IRA. The contribution limits for the traditional IRA and Roth IRA are the same.
Another thing you’ll want to consider is your annual income.
Traditional IRAs have no income conditions when it comes to your contribution. However, a Roth IRA is all about how much you earn, so you’ll need to consider your income to know if you qualify to contribute. If you want to contribute to the Roth IRA, the modified adjusted gross income (MAGI) according to the guidelines, read as such:
Married and Filing Jointly:
MAGI limit starts at $218,000
Single | Head of Household | Married but Filing Separately:
MAGI limit starts at $138,000
If your income is above these limits and keeps you from contributing to a Roth IRA, you can still invest in retirement through other accounts like the traditional IRA or a 401(k) at your job (if applicable).
Although the Roth IRA comes with income limits, it does not come with age restrictions, which means anyone can contribute — even kids. Whether your child is starting their first summer job or about to enter college and will be working part-time, they can contribute money into a Roth IRA account. You can even contribute money on your child’s behalf.
How To Take Advantage of the Changes
Now that you know the increases and changes that have taken place with the Roth IRA for 2023, will you take advantage of it? Automating your contributions is the best way to do that if you do. If you’ve checked and double-checked your income to know that you qualify for the maximum contributions and decided that economically, it’s a good thing for you, the easiest way to ensure your contributions is to automate them.
Take the applicable amount ($6,500 or $7,500) and divide that number by the remaining months in the year.
Whatever that figure turns out to be, set up your account so that those funds are automatically contributed to your account each month.
This will help keep you on target for retirement.
The Bottom Line
We all plan to live long enough to enjoy retirement, which means we hope to be old enough to retire. There are so many years on the front end of retirement that there’s no reason for us not to be ready when retirement comes. That’s why it’s so important to start now. Starting now earns you a comfortable seat living the life you want in retirement and not being stressed or worrying about how you will make ends meet.
The 2023 Roth IRA increases only help make retirement even more enjoyable — for those in the planning stages. While whether or not you decide to maximize your contribution to your Roth IRA account depends on your circumstances and total income, it’s certainly worth considering as you strive to make the most of your retirement years.
Read More: Why You Should Start a Roth IRA