Contributing to an individual retirement arrangement (IRA) is a great way to grow your retirement savings and benefit from tax-sheltered investment growth, or tax-free growth in a Roth option. The annual IRA contribution limit in 2023 has increased to $6,500 for people under 50, and up to $7,500 for people over the age of 50, compared to the respective 2022 of $6,000 or $7,000. Depending on your income level and other factors, these contributions may have additional restrictions.
The IRA contribution limits apply to your combined traditional and Roth IRA contributions. This means if you have a Roth IRA and a traditional IRA, your contributions to both cannot exceed the $6,000 limit in 2022 or the $6,500 limit in 2023.
The annual contribution limit is just one part of the IRA contribution rules. Roth IRA contributions may be further limited if your modified adjusted gross income (MAGI) is over a certain threshold. In other words, the amount you can contribute is reduced and eventually eliminated at higher incomes. This isn't the case for traditional IRA contributions as there are no income limits. However, the amount you can deduct from your tax return phases out with higher incomes.
Modified Adjusted Gross Income (MAGI) is adjusted gross income (AGI) with some deductions and exclusions added back in. (For instructions on figuring your MAGI, see IRS Publication 590-A, Worksheet 1-1 for traditional IRAs and Worksheet 2-1 for Roth IRAs, or reach out to your tax advisor)
Tax Deductions for Traditional IRA Contributions
Contributions to a traditional IRA may be tax-deductible for some investors depending on income. If you (and your spouse, if you’re married) are not covered by an employer-sponsored retirement plan, you may deduct your full contribution from your taxes for that filling year.
For example, if you didn’t have access to a workplace retirement plan and you contributed $6,500 to a traditional IRA in 2023, you’d be able to deduct $6,500 from your taxes. Same deal if you’re married and neither spouse is covered by a retirement plan at work.
If you (or your spouse, if you’re married) are covered by an employer-sponsored retirement plan, then the traditional IRA tax deduction may be limited based on your modified adjusted gross income (MAGI). Check your eligibility for a traditional IRA tax deduction on the table below.
Traditional IRA Tax Deduction Income Limits for 2022 and 2023
Higher Tax Deduction Income Limits for Married Couples with One Spouse with a Workplace Retirement Plan
There is a separate set of income thresholds for traditional IRA tax deductions for married couples where one spouse is covered by a workplace retirement plan and the other spouse is not. Check your eligibility for a tax deduction on the table below.
Roth IRA Contribution Limits for 2022 and 2023
Contributions to traditional IRAs and Roth IRAs must be considered jointly when considering contribution limits. You may contribute to both a Roth IRA and a traditional IRA but the limit is combined for a total of $6,000 for the year 2022, and a contribution limit of $6,500 for the year 2023. If you are 50 or older by the end of 2022, you may contribute up to $7,000 to a Roth IRA or traditional IRA, by April 18th of 2023. This amount rises to $7,500 in the year 2023.
Not everyone is allowed to contribute to a Roth IRA, however. If your income is above certain thresholds, you may be ineligible for a Roth IRA contribution or your contributions may be limited. Below are the Roth IRA income thresholds for 2022 and 2023.
Roth IRA Income Limits in 2022 and 2023
What about Backdoor Roth IRAs?
A backdoor Roth IRA is a strategy rather than an official type of individual retirement account. It is a technique used by high-income earners, who exceed Roth IRA income limits. These high-income earners can convert their traditional IRA to a Roth IRA.
The backdoor Roth IRA strategy is a legal tax and retirement strategy. When you transfer the assets of a traditional IRA to a Roth IRA, you owe taxes on any funds: the principal, earnings, and appreciation, that have not been taxed previously. If the IRA has been funded solely with tax-deductible contributions, then the entire value of the transferred assets will be taxed; however, as with any Roth IRA, if you follow the rules, you should owe no further taxes when you make withdrawals in the future.
Exceptions to IRA contribution limits
There are a couple caveats you should know about.
- You generally can’t contribute more than you earn. If your taxable compensation for the year is $4,000, that’s also your maximum IRA contribution limit.
- Non-working spouses without income may contribute to an IRA. If they do not have taxable compensation, but file a joint tax return with a spouse who earns enough income to cover their contribution amount, they may contribute to what’s called a spousal IRA. If both spouses want to contribute the maximum to an IRA, the working spouse will need to earn at least $13,000 (or $15,000 if both spouses are over age 50) to cover the $6,500 annual maximum (or $7,500 over age 50 annual maximum) for each spouse based on annual limits of year 2023.
- Contribution limits don’t apply to rollover contributions. If you roll another retirement plan, such as a 401(k) or 403(b) from a previous employer, into your IRA, the rollover doesn’t count toward the annual contribution limit.
- You should also note the deadline for IRA contributions for any given tax year is tax day of the following calendar year. Year 2022 IRA contributions can still be made until April 18th of 2023.
What Happens If You Contribute Too Much to an IRA?
If you aren’t careful with your IRA contributions, you can exceed the annual limits. People who are juggling multiple IRA accounts or who set automated contributions too high could end up putting too much money in a Roth IRA or a traditional IRA. If you’ve exceeded contribution limits, the IRS charges a 6% tax each year on the excess contributions in your account, unless you fix the situation. If you realize your error before you file your tax return, you may withdraw the excess contributions, including earnings, ahead of the tax filing deadline to avoid the 6% tax.
If you don’t catch the problem until after you’ve filed your tax return for the year, you can remove the excess contributions and file an amended return by October 15th. If you miss the later deadline, you can still fix it by reducing next year’s contributions by the excess amount. But you’ll have to pay the 6% penalty until the excess contributions are corrected.
If you contributed too much to your IRA, it might be a good idea to talk with a tax professional and a Telos advisor about setting up better ways to manage your contributions.
What's best for you? Traditional IRA or Roth IRA
If you're wondering which IRA is best for you to contribute to, both have their pros and cons. It's important that you contribute to the best type of account for your situation. What's best for one person may not be what's best for you. Here is a quick summary of each a Roth IRA and a traditional IRA.
You pay taxes on your dollars before contributing but get tax-free growth and withdrawals in retirement.
The amount you can contribute phases out at higher incomes.
Contributions aren't deductible, but you may be eligible for savers credit.
You can contribute pre-tax dollars and enjoy tax-free growth, but you pay taxes when you withdraw during retirement.
There are no income restrictions to contribute.
Contributions are deductible depending on your income.
If you have more questions about whether or not an IRA contribution is right for you or which type of retirement account you should be contributing to, please do not hesitate to contact your Telos advisor or reach out to us in the "contact us" section of our website.