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| Example Scenario 2022 | |
|---|---|
| Filing Status | Single |
| Modified AGI | $132,000 |
| Age | 49 |
- 2022 MAGI: $132,000
- $132,000 – $129,000 = $3,000
- $3000 / $15,000 = 0.2
- 0.2 * $6,000 = $1,200
- $6,000 – $1,200 = $4,800
Using the example information above, the calculated reduced limit would be $4,800 for this individual.
The contribution deadline for Roth IRAs for a particular tax year is usually the filing deadline for that year.
Details of Roth IRA Contributions
The Roth IRA has contribution limits, which are $6,000 for 2022 and $6,500 for 2023. If you’re age 50 or older, you can contribute an additional $1,000 as a catch-up contribution. Contributions, not earnings, can be withdrawn tax-free at any time.
It’s worth noting that an investor can have both a Roth and a traditional IRA and contribute to both, but the contribution limits apply across all IRAs. For example, suppose an investor contributes $4,000 to a Roth IRA. In that case, that same investor could contribute $2,000 to their traditional IRA in that same year (assuming that their contributions are not limited by their MAGI). If that taxpayer is age 50 or older, they could contribute an additional $1,000.
Age Contribution Limits
There is no age limit for making contributions to an IRA. There has never been an age limit on Roth IRAs, but traditional IRA contributions used to have an age limit of 70½. That limit was removed with the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.
With a traditional IRA, your ability to participate in a qualified retirement plan (QRP), such as a 401(k), will dictate if and how much you can contribute to the IRA. With a Roth IRA, participation in a QRP has no bearing.
Roth IRA Contributions and the Saver’s Credit
Roth IRA contributions are not tax-deductible. They are made with after-tax dollars. However, low- and moderate-income taxpayers may qualify for the Saver’s Credit.
This tax break allows for a tax credit of 10% to 50% for the amount contributed to a Roth IRA. Depending on the filing status, adjusted gross income (AGI), and Roth IRA contribution, the credit can be up to $2,000.
For tax year 2022, the top-end income limits are $68,000 for those married filing jointly ($73,000 for 2023), $51,000 for head-of-household filers ($54,750 for 2023), and $34,000 for single taxpayers ($36,500 for 2023).
Withdrawals and the CARES Act
The passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020 allowed for the withdrawal of up to $100,000 from Roth or traditional IRAs without having to pay the 10% early withdrawal fee.
This hardship withdrawal was allowed for those economically affected by the COVID-19 pandemic. The account holder has three years to pay taxes owed on withdrawals vs. having to pay them in the current year. In addition, the withdrawals can be repaid and no taxes owed. The repayment amount doesn’t count toward the contribution limit.
Roth IRA Alternatives
If you are ineligible for a Roth IRA, you may still be able to find tax-exempt options to generate retirement income. If your company offers a Roth 401(k) option, this is something to consider.
If not, you can look to permanent life insurance products like whole life that contain a tax-advantaged cash accumulation component. This can be drawn down during retirement, or rolled into an annuity.
Municipal bonds are another tax-exempt strategy, but to gain the maximum tax advantage you must be a resident of the place where they are issued. Moreover, municipal bonds often pay tax-equivalent yields similar to or lower than taxable bonds.
What Is Modified Adjusted Gross Income (MAGI)?
Modified adjusted gross income (MAGI) is your adjusted gross income (AGI) minus certain allowable deductions and tax penalties. The Internal Revenue Service (IRS) uses your MAGI to determine whether you qualify for certain tax benefits. For example, your MAGI must be below specified limits, set by the IRS, to contribute to a Roth individual retirement account (Roth IRA).
Can You Be Too Old to Contribute to a Roth IRA?
There is no age limit to opening and contributing to a Roth IRA. There used to be an age limit of 70½ for contributing to a traditional IRA, but that was done away with by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.
How Much Can You Contribute to a Roth IRA?
For the 2022 tax year, you can contribute up to $6,000, or $7,000 if you are 50 or older. This increases to $6,500 and $7,500 respectively for 2023. However, your tax filing status and MAGI may limit how much you can contribute.
Can I Contribute to Both a Roth and Traditional IRA?
Yes, you can keep and contribute to both a Roth and Traditional IRA, but you cannot exceed the annual contribution limit between the two accounts. For instance, if the annual limit is $6,000 you can contribute $3,000 to each account.
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