Maximizing Your Roth IRA
Quick Recap: What is a Roth IRA Again?
A Roth IRA is a type of individual retirement account that offers tax-free growth and withdrawals in retirement. Unlike traditional IRAs, Roth IRAs are funded with after-tax dollars, meaning you pay taxes on the money before you contribute it. The contribution limits for Roth IRAs are the same as for traditional IRAs, but there are income limits that determine eligibility to contribute. [We honestly think they’re pretty great!] Overall, a Roth IRA can be a great option for those who anticipate being in a higher tax bracket in retirement and want to avoid paying taxes on their savings.
When is the Deadline to Make 2022 Roth IRA Contributions?
April 18th, 2023 is the deadline to get credit for a 2022 contribution.
Are There Contribution and Income Limits?
Yes. For 2022, individuals can contribute up to $6,000 per year to a Roth IRA, or $7,000 if they are age 50 or older. In 2023, this limit will be increased to $6,500 and $7,500 respectively. It’s important to note that there are income limits that may impact eligibility to contribute to a Roth IRA. The income limits for Roth IRA contributions are based on how you file your taxes (Single, Married Filing Jointly, Head of Household, etc) and can be found here.
I’m Above the Income Limits, am I Out of Luck?
Not exactly, you may still qualify for what is commonly referred to as a “Backdoor Roth IRA contribution.” If you have no other Traditional IRAs (a 401k is not an IRA), you may be able to get a contribution up to the annual limit into your Roth IRA, albeit with a couple of extra steps. The Backdoor Roth contribution revolves around funding a non-deductible traditional IRA, and then immediately converting that contribution to a Roth. For now, there are no income limits for converting any IRA to a Roth IRA. You would only pay taxes on any gains from the conversion (because you would be converting immediately, there are no gains - thus no additional taxes).
Why Would I Waste Time Making a Roth IRA Contribution or Completing a Backdoor Roth IRA Contribution?
It really doesn’t take that much time at all if you have everything set up. For a direct Roth IRA contribution, once your account is established, you can electronically make a deposit using a connected bank account. If you need to make your contribution via the Backdoor Roth IRA, it generally takes less than 10 minutes each year to complete:
Make a contribution electronically
Wait until the funds settle, generally a couple of days
Convert the funds to your Roth IRA
The Benefits of Not Paying Tax on Gains Could be Substantial.
Utilizing a Roth IRA instead of a traditional brokerage account eliminates the responsibility to pay taxes on the gains within the account. In a brokerage account scenario, you may owe taxes for interest earned, dividends, or selling your holdings for a gain (commonly referred to as capital gains). With a Roth IRA, the account grows tax-free and as long as the proceeds are paid out correctly, no tax is owed on withdrawals.
While the calendar year may be over, you still have time to contribute to your 2022 Roth IRA. 2022 Roth IRA contributions must be made by April 18, 2023.
If you have any questions about your contribution limits or if a Roth IRA would be the right fit for you, we’d love to chat with you.
You can reach me directly at billy@auroramgt.com.
Disclosure: This blog does not constitute advice. This is not an offer to buy or sell securities. The material has been gathered from sources believed to be reliable, however Aurora Financial Strategies cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. To determine which investments or planning strategies may be appropriate for you, consult your financial advisor or other industry professional prior to investing or implementing a planning strategy. This article is not intended to provide tax or legal advice, and nothing contained in these materials should be taken as such. To determine which tax planning strategies may be appropriate for you, consult your tax advisor. Investment Advisory services are offered through Aurora Financial Strategies Advisory services are only offered where Aurora Financial Strategies and its representatives are properly licensed or exempt from licensure. No advice may be rendered unless a client agreement is in place.
About the Author
Billy Cardwell, CFP®
Billy Cardwell is an Owner & President of Aurora Financial Strategies, a financial advisory firm based out of Kokomo, IN. He can be reached via email at billy@billycardwell.com. Investment Advisory Services are offered through BCGM Wealth Management, LLC, a SEC registered investment adviser.