An IRA is an excellent way to save for retirement, particularly if you don’t have a workplace savings plan. You can contribute up to $6,500 to a Roth or traditional IRA in 2023. The deal gets sweeter with a $1,000 catch-up limit if you’re over the age of 50. Avoid paying taxes and penalties by staying within these limits and the new 2023 income limits for traditional and Roth IRAs.
2023 IRA Contribution Limits and Tax Deductions
The IRS has several regulations regarding individual retirement account contribution limits. The guidelines are fairly straightforward for most people. However, you should speak to a financial advisor if you are self-employed or have unusual tax circumstances. Your goal is to maximize your IRA benefits while avoiding taxes or penalties.
Unlike contribution limits for 401(k)s and other retirement accounts, IRA contribution limits don’t rise much from year to year. The IRA bases income limits on a cost of living index, so this number typically increases.
Opening an IRA is a great way to build retirement savings, particularly if your employer doesn’t offer a 401(k) plan. IRA contributions are tax-deductible. You pay taxes at a lower rate in retirement when you take a distribution. However, you lose the deduction if your income is high enough.
2023 Roth IRA Contribution Limits
The $6,500 or $7,500 contribution limit is the same for traditional and Roth IRAs, except in certain situations. The additional $1,000 is available if you’re at least 50 years of age. This catch-up contribution allows eligible participants to save more as retirement approaches.
- Remember, if you pay IRA brokerage fees, the cost counts toward your annual contribution limit.
- You can contribute to a Roth account and a traditional account at the same time. The $6,500 or $7,500 limit applies to the two accounts combined.
- Single or head of household Roth IRA contributions phaseouts increase in 2023 to between $138,000 and $153,000. If you file a joint return and make $218,000 and $228,000, your contributions begin to phase out, as well.
| IRA Type | Description | Contribution Limit |
|---|---|---|
| Traditional | No income limit to make contributions, but the tax deduction is limited by income. | $6,500 ($1,000 catch up age 50+) |
| Roth | Eligibility to contribute depends on income. | $6,500 ($1,000 catch up age 50+) |
| Self-directed | The investor manages investments. Same contribution limits as traditional IRAs. | $6,500 ($1,000 catch up age 50+) |
| Nondeductible | Same contribution limits as other IRAs, with no tax deduction. | $6,500 ($1,000 catch up age 50+) |
| Spousal | Provision for non-working spouses to have an IRA. Two working spouses may contribute to separate accounts. | $6,500 each or $7,000 for spouses 50+ |
2023 Income Limits and IRA Savings
The IRS doesn’t allow you to put more than your annual income from employment into an IRA. If you earn less than $6,500, you can put all of your income into the retirement savings account. The same applies if you are over 50 and earn $7,500.
Modified gross income: The income limits for IRA eligibility refer to your modified adjusted gross income (MAGI). The formula for determining your MAGI adds some deductions back into your adjusted gross income. Use Worksheet 1-1 Figuring Your Modified AGI from IRS Publication 590-A to calculate your MAGI.
High-income earners: Your income level can reduce or disqualify you from investing in a Roth IRA. There is no annual compensation limit for self-directed IRAs or traditional IRAs. However, the amount of your tax deduction for contributions diminishes as your income increases. You lose the deduction altogether in 2022 once you earn $138,000 (single) or $218,000 (married filing jointly).
Nondeductible IRAs: If your income is too high for a tax deduction, you can still save money in a nondeductible IRA. You make contributions with after-tax dollars, investments grow tax-free and distributions aren’t taxed during retirement. If you’re interested in a broader range of investments, consider a Gold IRA or other self-directed IRA.
Backdoor Roth IRAs: As a workaround for the Roth IRA income limit, backdoor IRAs aren’t as dubious as they sound. You can contribute to a new or existing traditional IRA and then roll the funds into a Roth IRA. Backdoor IRAs are compliant with IRS rules in 2021.
2023 Spousal IRA Contributions
Two spouses earning income from employment (not investment and other passive income) can each have a separate IRA. Each partner can contribute up to $6,500 ($7,500 if they’re over the age of 50). The total combined household contribution maxes out at $13,000 to $15,000.
Spouses who are not employed can still establish a traditional IRA if the other spouse is working. Married couples qualify for spousal IRA contributions if they file a joint return. Household taxable income must be equal to or higher than the total contribution amount.
Age Limits on 2023 IRA Contributions
The IRS no longer places an age limit on making regular contributions to traditional or Roth IRAs. As long as you have earned income, you can add to your retirement savings.
When Do 2023 IRA Contribution Limits Start?
You are eligible to make Roth or traditional IRA contributions from Jan. 1, 2023, until you file your tax return. You can designate contributions to 2023 or 2024 until you file your return in April 2024. This rule doesn’t apply to tax return extensions. The provision differs from employer-sponsored retirement accounts, where you add to saving from January 1 through December 31.
If You Overcontribute to an IRA
Keep track of how much you’re putting into the account, especially if you use a self-directed IRA. You’ll pay income tax on IRA contributions over the annual limit at a 6% rate. The taxation continues as long as the funds remain in your account.
- To avoid the tax, you must withdraw the excess amount and any associated investment income. Include Form 5329 with your tax return and include the earnings in your gross income.
- If you discover the overage after you file your annual return, you have six months to file an amended return. After that time, you will pay the 6% penalty.
- Alternatively, you could shift the contributions to the following year. This strategy, called recharacterization, wipes out the overage. Just be sure to adjust contributions for the next year.
Bottom Line
2023 IRA contribution limits and income limits increased. Understand these limits and other rules the IRS imposes on traditional and Roth IRAs to avoid paying taxes and penalties. An IRA is an excellent retirement savings account, but the limits can change. Review IRA contribution, income and other limits annually to stay in compliance.