When it comes to saving and investing for retirement, one of the most popular options is contributing to a Roth IRA. It’s flexible, your earnings grow tax-free, and all qualified withdrawals are tax- and penalty-free. Roth IRAs also offer savers a variety of benefits that can help you reduce your taxable earnings and enjoy peace of mind in your golden years. 

But, as with any investment tool, Roth IRAs aren’t a one-size-fits-all savings option.

Should you contribute to a Roth IRA in 2023?

The answer depends on several factors, including your income level and family circumstances. And while I can’t say with certainty if maxing out your Roth IRA is the best financial move you can make in 2023, I can offer a few considerations to keep in mind as you’re deciding where to allocate your funds.

Roth IRAs come with strict income limitations

Before you make an inflation-friendly savings plan this year, you should take time to carefully estimate your income for 2023. In order to qualify for the tax benefits that come with a Roth IRA, you must earn less than $153,000 (if you’re filing as a single), or $228,000 (if you’re married and filing jointly). If you’re above this threshold, other savings vehicles, like 401k plans, may be more beneficial for your situation. 

If you do expect to end the year below that income requirement, the next step in making your savings plan is deciding if now is the right time to invest in a Roth IRA account. Some individuals who know for certain they won’t exceed the maximum annual income choose to set up an automatic monthly contribution and set the habit of building their savings right from the start.

However, if you’re not sure what your 2023 income will be— or if it will be close to that upper limit— we strongly advise clients to set their Roth IRA contributions aside and wait to contribute until the end of the year. If your income ends up being higher than expected and you’ve exceeded the Roth IRA contribution limit, you’ll be required to pull some money back out of your account, and could be liable for a penalty. 

Your long-term career plans can have a big impact on your savings

The benefit of a Roth IRA is that while you have to pay regular income taxes on the money you put into your account, when you withdraw that money in retirement, it’s all tax free. If you think your tax rate will decrease over time, it makes sense to save your pre-tax dollars in a traditional IRA account and reduce your tax burden now. On the other hand, if you expect to move into a higher tax bracket by retirement age, paying tax now and taking advantage of the tax-free withdrawals later on could benefit you more in your golden years. Just bear in mind that there are limits on how much money can be withdrawn without penalty each year, regardless of what bracket you fall into during retirement. 

Contributing to a Roth IRA may not be your only savings option this year

The third consideration to keep in mind is what other savings strategies, like a 401K or an HSA, are available to you. Sometimes, other savings vehicles have higher contribution limits and offer additional benefits that make them more suitable for your longer-term savings goals. 

For example, if your employer matches your 401K contributions, it makes sense to max out that match before you think about contributing to a Roth IRA. An HSA account is another valuable way to save money and reduce your tax liability, so that’s another account we often suggest prioritizing

Once you’ve maxed out these savings options, contributing to your Roth IRA can be a great next step. 

Take the guesswork out of retirement planning with customized guidance from a Cook Wealth advisor

Whether or not a Roth IRA makes sense for your financial situation this year depends on your income level, future plans, current tax rate, personal financial preferences, and long-term savings goals. But you don’t have to calculate these factors yourself. At Cook Wealth, we evaluate every savings opportunity available to our clients on an annual basis. We provide personalized advice tailored specifically to your family and situation. We know no two paths are alike— and neither are financial plans. 

Before you make a 2023 savings plan, talk to the financial experts at Cook Wealth. Our personalized services and relationship-centric advising helps business owners, young professionals, families, and retirees live life empowered.