Take advantage of higher IRA limits

Over the past year, the rising cost of living has certainly been challenging. But for investors, there’s at least one silver lining to inflation — a higher IRA contribution limit.

IRAS have been around for nearly half a century, but they’ve only been pegged to inflation since 2001. Since then, the contribution limit has risen every few years, with the last increase coming in 2019. Now, in 2023, the annual IRA contribution limit has moved to $6,500, up from $6,000 last year. If you’re 50 or older, you can put in up to $7,500 a year, up from $6,500 in 2022.

If you’ve already established an automatic investment plan for your IRA, you could consider bumping up your payments to accommodate the new, higher limits.

However, if you can afford it, you may want to fully fund your IRA as soon as possible, so the money can potentially be growing throughout the year. But you can contribute to your 2023 IRA any time from now until April 15, 2024. (And it’s also not too late to contribute to your 2022 IRA — you’ve got until April 18 of this year.)

If you haven’t yet opened an IRA, you might want to do so now to take advantage of the higher contribution limits. Depending on your situation, you could contribute either to a Roth or traditional IRA. Here are the basics for each one:

• Roth IRA – When you invest in a Roth IRA, your earnings and withdrawals are free from federal taxes, provided you’ve had your account at least five years and you don’t start taking money out until you’re 59½ or older. In 2023, you can contribute the full amount to a Roth IRA if you are single and your modified adjusted gross income (MAGI) is less than $138,000; above that amount, your contributions will be reduced until they are phased out completely at $153,000. If you’re married and file jointly, this “phase-out range” is $218,000 – $228,000.

• Traditional IRA – Generally, you can invest in a traditional IRA regardless of your income level. If you and your spouse don’t have a 401(k) or similar employer-sponsored retirement plan, your contributions are typically tax deductible; if you or your spouse do have such a plan, the tax deductibility will depend on your income level. But regardless of whether your contributions are deductible, your earnings can grow on a tax-deferred basis.

If you have a choice, which IRA should you pick? The decision largely revolves around this question: Would you benefit more from the traditional IRA tax deduction (assuming you qualify for it) or the taxfree withdrawals of a Roth IRA? And the answer mostly depends on whether your tax rate will be higher or lower during your retirement. If you are confident you’ll be in a higher tax bracket when you retire, the Roth IRA, with its tax-free withdrawals, might be the better choice. But if you think you’ll be in a lower tax bracket, you might benefit by taking the upfront tax breaks of a traditional IRA.

Of course, if you’re still many years away from retirement, it can be difficult to estimate your future tax bracket. Your tax advisor may be able to provide some guidance.

An IRA is one of the most popular retirement savings vehicles around — and for good reason. Consider putting one to work for you in 2023.