Roth Individual Retirement Account (IRA) Contributions

Tax Strategy
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Retirement
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Updated
2/18/2023

How It Works

Using this strategy, the taxpayer excludes Roth IRA distributions from taxable income in the year that the distributions are taken. In pre-retirement years, the taxpayer contributes funds to the Roth IRA. The contributions are invested and appreciate tax-free until retirement. The contributions aren’t deductible in the year of the contribution. This strategy is useful in tax years when the individual's tax rate is relatively low.

Eligibility

Confirm the following before using this strategy:

  • Do you or your spouse have “earned” income?
  • Are you and your spouse above the annual income limits for making Roth IRA contributions?

Earned income is income earned from employment or through a business. If you have no earned income, you can’t contribute to a Roth IRA.

If your income exceeds the annual limits, you can’t contribute to a Roth IRA.

Action Items

Follow these steps to use this strategy

  • Confirm your eligibility for a Roth IRA.
  • If you don't already have an IRA, open one at a brokerage, bank, or other financial institution.
  • Make a contribution to the IRA before the tax return filing deadline, which is on or around April 18th.

Limits (2023)

Your deductible IRA contributions are limited to:

  • $6,500; or
  • $7,500 if you’re age 50 or older.

Your contributions are 100% allowed up to the annual limit if your “Modified Adjusted Gross Income” is below:

  • $138,000 if you’re filing as Single or Head of Household;
  • $218,000 if you’re filing as Married Filing Joint.

Your contributions are now allowed if your “Modified Adjusted Gross Income” is above:

  • $153,000 if you’re filing as Single or Head of Household;
  • $228,000 if you’re filing as Married Filing Joint.

Your contributions are partially allowed if your “Modified Adjusted Gross Income” is in between these numbers.

IRC References

I.R.C § 408A Roth IRAs -

"For purposes of this title, the term “Roth IRA” means an individual retirement plan (as defined in section 7701(a)(37)) which is designated (in such manner as the Secretary may prescribe) at the time of establishment of the plan as a Roth IRA. Such designation shall be made in such manner as the Secretary may prescribe."

This content is for informational purposes only and does not constitute legal, business, or tax advice. You should consult your own attorney, business advisor, or tax advisor regarding matters mentioned in this post. We take no responsibility for actions taken based on the information provided.

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