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Why open an IRA?

Individual Retirement Accounts or IRAs can be a useful tool that can help you build your finances, prepare for a better retirement, and get savings at tax time. However, some people are confused about what they are, how much they can contribute, and the deadline for their contributions. I’ll answer some common questions to help you feel more comfortable using them.

Max Out Your IRA Contributions

Max Out Your IRA Contributions

When should you start investing in an IRA? As soon as you can, provided that you have an emergency fund in place and don’t have any high-interest debts.

How much can you contribute to your IRA? For 2023, you can contribute $6,500 per year or the amount of your taxable compensation. If you’re over 50, you get an additional $1,000 added to your contribution ($7,500 total per year). Don’t forget that these are for individuals, so a couple younger than 50 can contribute $13,000 into IRAs ($6,500 each). If you can max out your contributions, then please do so.

With IRA contributions, there are guidelines for the deduction and contribution limits. If you contribute to your traditional IRA by April 15th, you may be able to claim a tax deduction on your tax return for the amount contributed. Roth IRA contributions, however, are not tax deductible since the qualified distributions are tax-free.

Make It Easy To Contribute

Make It Easy To Contribute

The easiest way to stay on target for your investment goals is to go ahead and automate your IRA contributions. It can be as small as $50/week; the important part is getting you into the habit of saving up for your retirement.

You can also set aside any bonuses or windfalls you get this year to deposit into your IRA.

Deadlines For Contributing To Your IRA

Deadlines For Contributing To Your IRA

Each year you still have until April 15th to make a tax-deductible contribution to your traditional IRA for the previous year and reap the benefits of a bigger tax refund.

If you’re covered by a retirement plan at work, use this table below to determine if your modified AGI affects the amount of your deduction.

2023 IRA Deduction Limits - Effect of Modified AGI on Deduction if You Are Covered by a Retirement Plan at Work

If Your Filing Status Is…

And Your Modified AGI Is…

Then You Can Take…

single or
head of household
$73,000 or lessa full deduction up to the amount of your contribution limit.
single or
head of household
more than $73,000 but less than $83,000a partial deduction.
single or
head of household
$83,000 or moreno deduction.

married filing
jointly or qualifying widow(er)

$116,000 or lessa full deduction up to the amount of your contribution limit.
married filing
jointly or qualifying widow(er)
more than $116,000 but less than $136,000a partial deduction.
married filing
jointly or qualifying widow(er)
$136,000 or moreno deduction.
married filing separatelyless than $10,000a partial deduction.
married filing separately$10,000 or moreno deduction.

If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the “single” filing status.


Modified Adjusted Gross Income (MAGI)

The IRS uses your modified adjusted gross income (MAGI) when it comes to IRA limits. This number can be close (or identical) to your adjusted gross income (AGI). It takes your AGI and adds back certain deductions, including:

  • Half of any self-employment taxes
  • IRA contributions and Social Security
  • Losses from a publicly traded partnership
  • Passive income or loss
  • Qualified tuition expenses
  • Rental losses
  • Student loan interest
  • The exclusion for adoption expenses
  • The exclusion for income from U.S. savings bonds
  • Tuition and fees

To calculate your modified adjusted gross income, find your AGI from your tax return. It’s on line 8b of the newly redesigned Form 1040. Then, use Appendix B, Worksheet 2 from IRS Publication 590-A to modify your AGI for IRA purposes.

Excess IRA Contributions: If You Contribute Too Much

It’s good to max out your IRA contributions. But if you go overboard, the IRS considers it an ineligible (or excess) contribution. If you contribute too much—or contribute to a Roth when your income is too high—you’ll owe a 6% penalty on the excess contribution each year until you fix the mistake.

Ineligible IRA contributions trigger a 6% penalty on any amount you over-contribute.

The good news: There are several ways to fix your mistake:

  • Withdraw the excess contribution (and any earnings on it) before the April tax deadline.
  • If you’ve already filed your tax return, remove the excess contribution (and earnings), and file an amended tax return by the October deadline.
  • Apply the excess to next year’s contribution. You’ll still pay the 6% penalty this year, but you’ll be set going forward.
  • Withdraw the excess next year by Dec. 31. You’ll pay the penalty for two years and then move on.

Of course, it’s best to avoid excess contributions altogether. Be sure to pay attention to the IRS’s contribution limits for the year, keep track of your contributions, and watch your income. Just because you were eligible to contribute last year doesn’t mean you still are.


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