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Inflation has been wreaking havoc on consumers for well over a year now. And in the course of 2022, many people have been forced to take on credit card debt or dip into their savings accounts just to do things like put food on the table and keep the heat running.
But while inflation has made life difficult for a lot of people this year, it’s had one nice silver lining. It prompted the IRS to raise the annual contribution limits for retirement plans like IRA accounts.
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IRAs are retirement plans you can open independently of an employer. Because there are tax breaks involved in contributing to these plans, the IRS limits the sum you can put in each year.
Right now, IRAs max out at $6,000 for savers under the age of 50 and $7,000 for those 50 and over. Next year, IRA contribution limits are rising by $500, so those under 50 will be able to contribute up to $6,500, while those 50 and over will be able to put in $7,500.
Maxing out an IRA is something a lot of people don’t manage to do. But if you make that a goal and stick to it, you’ll make financial guru Suze Orman really happy.
A move worth making
In a recent blog post, Orman wrote, “I would be thrilled if you gave serious thought to how you might be able to make a maximum contribution in 2023. If you’re under 50 that works out to $542 a month, or $125 a week. If you are at least 50, that works out to $625 a month, or $144 a week.”
When you think about it that way, maxing out an IRA seems doable. But it can also be a challenge. That’s why a good bet may be to put the process on autopilot.
Most IRAs let you set up an automatic transfer so that money moves out of your checking account and into your retirement savings each month off the bat. That way, you won’t be tempted to spend the money you’re supposed to be using to fund your IRA.
Why maxing out makes sense
IRAs come with tax breaks that regular brokerage accounts don’t offer. And so the more money you contribute, the more tax savings you can reap.
If you put money into a traditional IRA, you’ll exempt a portion of your earnings from taxes that year. If you fund a Roth IRA, you won’t get an immediate tax break, but your money can be invested on a tax-free basis, and withdrawals you take from your savings during retirement will be tax-free.
Plus, the more money you pump into your retirement savings, the more you stand to have later in life. That could come in very handy if your senior living costs wind up being higher than anticipated, or if you end up with a lot of health issues that are expensive to keep up with.
Which IRA should you choose?
Many people like the upfront tax break that comes with a traditional IRA. But if you don’t need that tax break to max out the account, then you may want to favor a Roth IRA. Doing so means not running the risk that tax rates will rise over time, leaving you with a greater IRS burden as a retiree.
Roth IRAs are also the only tax-advantaged retirement plan that doesn’t force savers to spend down their balances later in life. So if you want more flexibility with your money — say, the option to leave some of it behind to your heirs — then a Roth IRA is a good choice.
If you earn too much money to fund a Roth IRA directly, you can always contribute to a traditional IRA, convert your contribution to a Roth, and pay taxes on the money you move over. You can make a full Roth IRA contribution in 2023 if your income is under $138,000, or under $218,000 for couples.
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