Contribution Limits for Roth IRA Accounts
Like other individual retirement accounts (IRAs), Roth IRA accounts have a maximum amount that can be contributed annually, according to the Internal Revenue Service (IRS). Unfortunately, the downside of Roth IRA accounts is that these annual contribution limits are relatively low.
In 2022, you can contribute up to $6,000, and if you are age 50 or older, you can contribute an additional $1,000, known as the catch-up contribution, making the total $7,000. In 2023, you can contribute up to $6,500, and if you are age 50 or older, you can contribute $7,500, including the catch-up contribution.
Note: These are the combined contribution limits for Roth IRA accounts and traditional IRAs. For example, if you are 42 years old and have both a Roth IRA and a traditional IRA, you can contribute up to a total of $6,000 between the two accounts.
Income Limits for Roth IRA Accounts
According to the Internal Revenue Service (IRS), your income must be below a certain threshold in order to contribute the maximum allowable amount annually to a Roth IRA. Once your income reaches a certain threshold, the amount you can contribute to a Roth IRA begins to phase out.
If your Modified Adjusted Gross Income (MAGI) exceeds the income limits for a Roth IRA, you are ineligible to contribute. Here’s how it breaks down:
Roth IRA Income Limits for 2022:
- Single filers, Head of household, or Married filing separately and did not live with your spouse at any time during the tax year: Less than $129,000 – up to the maximum, $129,000 or more but less than $144,000 – reduced amount, $144,000 or more – $0.
- Married filing jointly or qualifying widow(er): Less than $204,000 – up to the maximum, $204,000 or more but less than $214,000 – reduced amount, $214,000 or more – $0.
- Married filing separately and lived with your spouse at any time during the tax year: Less than $10,000 – reduced amount, $10,000 or more – $0.
For example, if you are 37 years old and filing single with a Modified Adjusted Gross Income (MAGI) of $125,000, you can contribute the full amount of $6,000 to your Roth IRA.
However, if your income rises to $135,000, according to Roth IRA rules, you will be limited to a reduced contribution of $2,400. Since you are still eligible to contribute a total of $6,000 to IRAs for the year, you can place the remaining $3,600 into a traditional IRA.
Here are the Roth IRA income limits for 2023:
- Single filers, Head of household, or Married filing separately and did not live with your spouse at any time during the tax year: Less than $138,000 – up to the maximum, $138,000 or more but less than $153,000 – reduced amount, $153,000 or more – $0.
- Married filing jointly or qualifying widow(er): Less than $218,000 – up to the maximum, $218,000 or more but less than $228,000 – reduced amount, $228,000 or more – $0.
- Married filing separately and lived with your spouse at any time during the tax year: Less than $10,000 – reduced amount, $10,000 or more – $0.
Note:
You cannot contribute an amount greater than your taxable income in any given year. Therefore, if you only earn $4,000, the maximum contribution to a Roth IRA will be $4,000.
Where to Invest After Exhausting Your Roth IRA
You have several options for investing after exhausting your Roth IRA. However, if you have a retirement plan at work like a 401(k) or 403(b), consider contributing enough to get the full employer match before funding a Roth IRA. Otherwise, you’re leaving free money on the table.
You can also save money for non-retirement goals, such as a down payment on a home or a 529 plan for your child’s education. But if you want to invest more in retirement savings after you’ve exhausted your Roth IRA contributions, here are some options.
Yes, you can contribute to both a Roth IRA and a Roth 401(k) or 403(b) if you meet the income limits.
Invest in a Spousal Roth IRA
If your spouse has no taxable income and you file a joint tax return, you can fund a Spousal Roth IRA on their behalf. A Spousal Roth IRA can be either a Roth IRA or a traditional account. The contribution limits are the same, so if both of you are under 50, the maximum contribution is $12,000 combined for 2022 ($13,000 for 2023).
Max Out Your 401(k) or 403(b)
If you contributed enough to get the employer match in your 401(k) or 403(b) before exhausting your Roth IRA contributions, consider going back to contribute the non-matching funds.
In 2022, you can contribute up to $20,500 to a 401(k) or 403(b) ($22,500 in 2023), provided you do not exceed your salary with your contributions.
If you’re over 50, you can make an additional contribution of $6,500 if your plan allows it ($7,500 for 2023).
Make After-Tax Contributions to Your Company Plan
More than 86% of 401(k) plans now offer a Roth option that allows employees to invest after taxes, according to the Plan Sponsor Council of America. If you have this option, you can max out your 401(k) or 403(b) and receive the same tax-free growth you get with a Roth IRA. However, if your employer matches part of your contribution, the match will always be made before taxes.
Invest in Taxable Non-Retirement Accounts
If you’ve exhausted your Roth IRA and workplace account, or if you want the ability to withdraw your money anytime you want, consider a taxable investment account.
These accounts have no annual limits or early withdrawal penalties. You will owe taxes on your gains, but you can reduce the bill if you hold securities for more than a year to secure lower long-term capital gains rates.
Note
If you’re self-employed, you can save tax-advantaged money through a retirement plan for self-employed individuals like a Simplified Employee Pension (SEP IRA) or a solo 401(k).
Conclusion
Exhausting your contribution to a Roth IRA for the tax year can be a smart decision because you can secure a source of tax-free income in retirement. However, you should prioritize obtaining your employer’s match if available to you because it’s free money.
After
In order to contribute enough to the employer-sponsored plan to achieve full equity and fully deplete your Roth IRA account, you may contribute more funds to your workplace plan or consider other options such as a spousal Roth IRA, a self-employed retirement plan, or a taxable investment account.
Frequently Asked Questions (FAQs)
Why should I fund my Roth IRA first?
Typically, you want to fund your Roth IRA only after achieving full retirement match from your employer. After that, funding your Roth IRA is a good option because you get unlimited tax-free growth and tax-free withdrawals in retirement.
What is the last day to fund my Roth IRA?
You have until tax day to fund your Roth IRA, which is usually on April 15 of the year following the tax year unless postponed if April 15 falls on a holiday.
Source: https://www.thebalancemoney.com/what-to-do-after-maxing-out-your-roth-ira-5248421
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