When it comes to investing for retirement, an employer-sponsored plan, like a 401(k), can be a great starting point – but depending on your individual retirement goals and projected expenses, it may not be enough.
Those looking to maximize their assets for retirement often pair an Individual Retirement Account (IRA) with their employer-sponsored retirement plan. It’s a tactic that can allow you to take full advantage of any employer matching incentive through a 401(k) while simultaneously contributing to a separate tax-advantaged retirement account.
While both 401(k)s and IRAs have contribution limits imposed by the federal government, those limits have been raised for tax year 2023 – giving you the opportunity to invest more than ever before.
IRA contribution levels and income guidelines raised for 2023
In response to rising inflation, the IRS has raised contribution rates for retirement accounts to accommodate the higher cost of living, allowing you to invest more toward retirement.
Beginning this year, IRA contribution limits have been raised to a maximum of $6,500 annually, up from $6,000 in previous years. If you’re age 50 or older, you can make an additional catch-up contribution of $1,000, allowing you to invest a total of $7,500.
Roth IRAs do have income limits, so individuals making above a certain income threshold are eligible for reduced contributions. Individuals who earn above the upper range of that threshold are not eligible at all.
In 2023, the income phase-out range for single filers is $138,000 to $153,000. For married couples filing jointly, it’s $218,000 to $228,000.
Traditional IRAs have income limits related to being able to take a tax deduction for those contributions. In 2023, the tax-deductible income limits are a Modified Adjusted Gross Income of $83,000 for single filers and $136,000 for joint filers. Those with income above those limits can still contribute but won’t be eligible for the tax deduction.
In addition to the new contribution rates for IRAs, the maximum contribution to a 401(k) plan has been raised to $22,500, with an added catch-up contribution allowed of up to $7,500 for those over age 50.
Let’s take a closer look at IRAs in particular.
What is an Individual Retirement Account or IRA?
An IRA is a tax-advantaged investment account that allows you to accumulate retirement assets on a tax-deferred basis. An IRA can be funded with pre-tax dollars (known as a traditional IRA) or with money that’s already been taxed (known as a Roth IRA).
Why should I have an IRA?
Many people are familiar with employer-sponsored retirement plans, like 401(k) plan accounts. These accounts have their own limits on how much you can contribute annually ($22,500 per year in 2023) but are generally limited to the investment options chosen by your employer. Simply put, your choices for how you invest your money may be more limited. An IRA may provide you with access to a greater range of investment choices and may allow you the option to invest up to an additional $6,500 annually ($7,500 if you are eligible for catch-up contributions) toward your retirement. In addition, if you’re married but don’t work yourself, you may have the option to open a spousal IRA, which allows your spouse to contribute to an IRA in your name, as long as certain income limits are met.
Which IRA is right for me?
Consider the following benefits and options IRAs can provide.
I want my withdrawals in retirement to be tax-free: Roth IRA
A Roth IRA allows you to use after-tax dollars and receive tax-free growth, so you can take your earned income and invest it for retirement. Over your lifetime, the tax savings on your investments in a Roth IRA account help speed the growth of the account. This means money invested now does more for you in retirement. And the ability to withdraw the assets tax-free in retirement makes it easy to access the funds when you need them.
- The maximum annual Roth contribution is $6,500 in 2023 ($7,500 if age 50 or older).
- You are not required to take withdrawals from a Roth IRA in retirement.
- You can take withdrawals of your contributions in times of need without penalty, but there is a penalty for withdrawing the growth on the account before age 59 ½.
- You must wait five years to withdraw earnings and do certain types of rollovers.
I need tax savings now: Traditional IRA
A Traditional IRA provides the ability to write off contributions to the account, giving you tax savings now. If you’re making more now than you think you will have in income in retirement, consider taking your tax savings when you need it the most. The money invested is then considered “pre-tax dollars.”
Unlike a Roth IRA, you will pay taxes on assets that come out of a Traditional IRA at retirement, and a penalty if taken before age 59 ½, so you’ll want to have a strategy about how and when to take withdrawals in retirement.
- Contributions may be tax-deductible, based on income limits.
- You may only contribute $6,500 annually as of 2023, or $7,500 if you are age 50 or older.
- There is a penalty for funds withdrawn before age 59 ½.
- You are required to take distributions from Traditional IRAs during retirement, starting at age 72 (age 73 in 2023).
I don’t work outside the home: spousal IRA
A spousal IRA allows a spouse who doesn’t work outside the home to participate in owning and contributing to an IRA. The spousal IRA will operate the same way as a Traditional IRA or Roth IRA depending on what type of IRA is opened.
- Couples must file a joint tax return.
- Account can be funded with money from either spouse, but the account must be opened in the name of the spouse who does not work outside the home.
I want to have all my retirement plans in one place: rollover IRA
A rollover IRA allows you to consolidate one or more 401(k) plan accounts or other eligible qualified retirement plans into one account. For example, you may have changed jobs in your career and have multiple 401(k) plan accounts with former employers. A rollover IRA can allow you to consolidate those funds into a single IRA.
When thinking about consolidating employer-sponsored retirement plans, you may have several options to consider. These may include leaving the funds with your former employer’s plan, rolling the funds to a new employer’s plan, rolling the funds into a rollover IRA, or even cashing out. Each option has its own investment choices, costs and expenses and should be carefully considered by consulting your tax or legal advisor.
When it comes to choosing an IRA that’s appropriate for you and your unique financial situation, there are a number of important details to take into consideration:
- Contribution limits $6,500 for tax year 2023 (additional catch-up of $1,000 if over age 50).
- Earned income requirement You cannot contribute more to an IRA than you have earned in taxable income that calendar year.
- Early withdrawal penalties Generally withdrawals from an IRA before age 59 ½ are discouraged, as they may be subject to a 10% penalty as well as federal and state taxes.
- Required minimum distributions Traditional IRAs require that you begin taking annual distributions at age 72 (age 73 in 2023) or your account may be subject to penalties and taxes.
- Rules for spouses IRAs cannot be held jointly. However, if you’re married, both spouses may be able to have an IRA and contribute up to the maximum allowed.
- Contribution deadlines You can contribute to your IRA up until tax day of the following year. So, contributions for 2022 can be made until April 18, 2023.
- Funding your IRA You do not have to fund your IRA in one lump sum, but rather can make contributions in any amount throughout the year, up to the maximum allowed.
Give your retirement plan a boost with an IRA
Whether you’re just starting to think about retirement or are at a point in life where you see retirement on the horizon, you now have the opportunity to invest more than ever before.