One Month Left in 2023 for IRA Contributions

The Roth IRA is one of the staples of the American retirement system. Its tax benefits are incredible, and one of those benefits is the ability to contribute to a prior year until tax day. So, if you haven’t looked at maxing out your Roth IRA contribution for 2023, here are four reasons why you should consider it.

1. Tax free growth: The biggest positive of a Roth IRA is the tax-free growth. Unlike a typical non-qualified investment account, there is no tax on the withdrawal. There is no 15% long term gains tax, and there is no ordinary income tax. A quick example, if you invest $6500, which is the max IRA contribution for 2023, and it grows to $10,000, you could pull all 10,000 without paying taxes. If this is done in a traditional IRA, you would have to pay income tax on the $10,000, and if it was a non-qualified account, you would pay a 15% tax on the $3500 in gains. There are restrictions when it comes to Roth IRA withdrawals, but we will get to that later.
2. Investment Freedom: This is one of the main differences between a Roth IRA, and a Roth 401K. A 401K plan is limited to the investment selection within the plan, whereas a Roth IRA can invest in whatever funds it chooses. By not being restricted to target funds, and index models, we can see a higher return over the long term. And to answer a question I get a lot, yes, you can max out a Roth IRA, and a Roth 401K.
3. No RMDs: Required Minimum Distributions are something we try to minimize. Why? Well, you have worked hard for the money and assets you have collected, as well as the social security payment you have earned. RMDs not only affect how much you need to take out of your traditional IRA, but also affect how your social security is taxed. With the Roth IRA, there are no RMDs, and there is no effect on social security. If you are interested in finding a way out of RMDs, check out my Roth Conversion article here.
4. Liquidity: As with any tax qualified investment account, there are typically penalties for early withdrawal. If we use that $6500 to $10,000 example from number one, we see the tax benefit for someone over the age of 59 ½. What about for people under 59 ½? Well, if you pull out the full 10,000 in a traditional IRA account, you will pay income tax on the $10,000, plus a 10% penalty. So, if you are in the 25% tax bracket, you pay $2500 in taxes, and an additional $1000 in penalty. So, you take home that $6500. With a Roth IRA, you can remove contributions at any time with no penalty. We take out that same $6500 we contributed, and the other $3500 stays in, growing tax free. If you did remove the whole $10,000 from the Roth IRA, you would pay ordinary income tax, and the 10% penalty on the $3500 of gains.

At the time of writing this article, there is one more month left to max out your 2023 contribution. That contribution limit is $6500, and if you are over 50, you can make an additional contribution of $1000, or $7500 total. If you would like to set this up, you can email me at korey@sdsmithfinancial.com, or use this link to set up a call. As always, thanks for reading!