A Roth IRA is a retirement account that allows individuals to fund accounts on an after-tax basis, but the growth of the underlying investment grows tax deferred. If certain criteria are met (account open for at least 5 years and individual is 59 ½ or older), distributions are income tax free. Roth IRAs are generally a way an individual can store funds away from the tax code for the remainder of their lives.
The 2023 IRA contribution limits increased from $6,000 to $6,500. For individuals age 50 and over, an additional $1,000 catch-up contribution can be made. IRA funding can be to either a Roth IRA, traditional IRA, or both; however, the $6,500 (or $7,500 if 50 or older) contribution limit applies to the total IRA contribution. The $6,500 can be split between a traditional and a Roth, but the total contribution between all IRAs cannot exceed the $6,500 limit (or $7,500 if 50 or older).
The rules specify that certain income caps are in place, limiting certain taxpayers from funding a Roth IRA.
For single tax filers making less than $144,000, there are no limitations to funding the $6,500 amount. Single tax filers making between $144,000 and $153,000 may fund a limited amount to a Roth IRA, and single tax filers making over $153,000 are not able to fund a Roth IRA.
For Married Filing Jointly tax filers making less than $214,000, there are no limitations to funding the $6,500 amount. Married Filing Jointly tax filers making between $214,000 and $228,000 may fund a limited amount to a Roth IRA, and Married Filing Jointly tax filers making over $228,000 are not able to fund a Roth IRA.
Married filing separately has an income limitation of $10,000 so couples don’t file separately for the sole purpose of funding Roth IRAs.
If an income falls between the range, the contribution allowance can be calculated by the following formula:
[(Income – Bottom Contribution Range)/(Top Contribution Range – Bottom Contribution Range)] x IRA Contribution Limit
This formula looks tough, but it’s not. For a single filer making $150,000, the formula is as follows:
[($150,000 - $144,000]/($153,000-$144,000)]x $6,500
($6,000/$9,000) x $6,500
0.67 x $6,500 = $4,355
It’s important to note that there is a way to step around the income limits for Roth IRA contributions by funding a nondeductible traditional IRA and immediately converting it to a Roth IRA. This is often referred to a backdoor Roth IRA funding strategy, and this particular strategy was up for discussion to be removed from Congress in 2022, but they decided to keep it; the backdoor Roth funding strategy was not contested in 2023.
The basic rules of the Roth IRA haven’t changed too much from 2022 to 2023, but the contribution limits have been adjusted slightly.