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What are the Income Limits to Contribute to a Roth IRA in 2023?

What are the Income Limits to Contribute to a Roth IRA in 2023?

The 2023 income limits for contributing to a Roth IRA have increased from the 2022 limits. For single filers, you may now contribute the maximum amount ($6,500) if your Modified Adjusted Gross Income (MAGI) is less than $138,000. For married filing jointly, you can contribute the maximum amount to your Roth IRA if your MAGI is less than $218,000. 

Many are aware that the contribution limit for a Roth IRA has been increased by $500 for 2023, meaning in 2023, an individual can contribute $6,500 to their Roth IRA – or $7,500 if they are 50 years of age or older, but this increase of the income contribution limit is also worth noting.

And when your MAGI is greater than those amounts, the IRS imposes phase-out contribution limits. Charles Schwab has a helpful chart for reference.

Roth IRAs are a great vehicle for retirement investing. Although contributions are made with after-tax dollars, meaning you will not receive a deduction on your income tax, qualified distributions will come out tax free. Additionally, the IRS does not impose Required Minimum Distributions (RMDs) on these accounts, meaning you can leave the funds invested longer. And should you need to draw on these funds before the golden age of 59 ½, you can withdraw your contributions without tax and without penalty.

As a reminder, especially for those who are lower wage earners (e.g., kids), you can still only contribute to a Roth IRA either the maximum amount or no more than your earned income for that year, whichever of the two is less.

ABOUT THE AUTHOR

Polly Price

CLIENT SERVICE SPECIALIST

Polly Price is a Client Service Specialist for Walkner Condon Financial Advisors. She supports the team of financial advisors with clients in Madison and around the country.

What Should I Do with My 401k After Leaving a Job?

What Should I Do with My 401k After Leaving a Job?

One of the first things that people think of when they leave their job is what to do with their 401(k) from that employer. While there is plenty of advice out there, much of it could be conflicted with pre-existing bias, depending on what benefit certain people or entities have in moving it or making it stay put. Hopefully, the options below will assist in your decision-making process as you decide what to do with your old 401(k). 

Three Options for Your Old 401(K)

For those looking for a quick and dirty list of your potential options for the 401(k) from your previous employer, that’s below. We dive further into each possibility and its pros and cons in the rest of this piece.

  1. Leave It
  2. Roll It Into Your New Plan
  3. Roll It Into an Individual Retirement Account (IRA)

Note: if you have a Roth of after-tax option, it does not impact the advice given here, though there are some nuances to Roth that should be explored as well.

Related Reading: What to Do With An Old 403(b)

1. Leave Your 401(k) With Your Previous Employer’s Plan

In most cases with 401(k) plans, as long as you have a balance that is large enough, you are not forced to do anything. Your investment options will likely remain the same, and you are simply put in a “separated service” section of participants. The pros of selecting this option? You will still have the ability to receive reports and reallocate the assets when you see fit. While you cannot contribute to it, you may hold it at the investment company. It’s not always the case, but typically, the larger the 401(k) plan, the lower the expenses. There can be some economies of scale that may allow you to reduce prices on some of your funds as well as administrative costs. 

The downside to leaving it there is that any changes to the 401(k) product company or investment lineup will impact you. If you like a particular fund and the plan sponsor gets rid of it, you will not be able to keep it. You are also governed by the plan document of the plan, which is basically the instructions that the participants have to follow. There can be additional fees that are passed down to participants as well, including potential financial advisory fees.  

 

2. Move Your Old 401(k) to Your New Employer’s Plan

If you are moving to a new job and you are offered another 401(k) plan, regardless of whether or not you are eligible to contribute funds out of your paycheck, you should be able to roll your existing 401(k) balance into the plan. This will be a tax-free event, and you will have to select new funds out of the lineup your plan sponsor offers. You likely will have to call your previous 401(k) company to initiate this rollover, and in many cases, there is paperwork involved. This allows you to consolidate your assets into one 401(k) plan for potentially better continuity in your investments. 

The downside is that fees may not be lower than your previous plan and the investment lineup will also be different. You could have fewer choices than your last plan, as well, so you will want to do a full side-by-side comparison of each plan’s investment options, expenses, and documentation to assure that this is the best option for you.

3. Roll Your Old 401(k) into an IRA

The “I” in IRA stands for individual. If you prefer to have more control over your assets, this may be a viable option. This involves contacting your previous employer and instructing them where to send the assets. It will remain free of taxation if you move the assets to an IRA held at a financial institution for your benefit (also known as FBO). For example, the check could be made payable to Charles Schwab FBO Jane Smith. An IRA is just a checkbox from the IRS, in that there is a significant amount of choice available to you in investment options. You may buy stocks and bonds, ETFs, mutual funds, real estate, cryptocurrencies, savings accounts, and many other options. 

The downside to rolling your old 401(k) into an IRA might come down to choice. There can be an overwhelmingly large amount of choices. Each choice carries its own risk and fees as well. Many financial advisors often recommend that clients roll their assets into IRAs. 

But this isn’t free of conflict. In many cases, financial advisors cannot receive compensation in the 401(k) plan, but can if they roll it into an IRA. Before you choose to move your assets into an IRA, you should consider the management fees, expenses, and objectives of your investment versus other alternatives. 

Considering the options above is essential to your future financial picture. Making the right choice can be very important, so take your time to understand how each option impacts you.

ABOUT THE AUTHOR

CLINT WALKNER

FINANCIAL ADVISOR

Clint Walkner is one of the co-founders and managing partners of Walkner Condon Financial Advisors. He is a fee-only, fiduciary financial advisor who works with clients locally in Madison and around the country.

What is the Difference Between a 401k and an IRA?

What is the Difference Between a 401k and an IRA?

A 401(k) is a qualified retirement plan that is sponsored by an employer. It allows employees to deduct a portion of their salary and put it into an account that is invested for their retirement. An IRA can be opened by an individual (hence the name Individual Retirement Arrangement) and is another vehicle that can help someone save for their retirement goals. You can participate in an employer-sponsored 401(k) and contribute to an IRA; you do not have to choose one or the other.

Both 401(k)s and IRAs are Tax-Advantageous Accounts

Before highlighting a few differences, let’s chat about the why. Why utilize either of these types of accounts? The short answer is that they are tax-advantageous vehicles that can help you get to your retirement goals. These types of retirement accounts can be tax-deferred or have tax-free growth characteristics. Most Americans enjoy the idea of delaying a tax bill from Uncle Sam and allowing their assets to compound. This is a powerful way to accumulate wealth long-term. 

401(k)s May Offer an Employer Match

Participating in your employer’s 401(k) plan can be advantageous because they might match a portion of your contributions. This is about as close an opportunity for “free money” as you will ever find. A 401(k) makes it easy for you to put money away from each paycheck toward your retirement. Once you are enrolled, the plan automatically takes a portion of your wages and puts it into your account. There are also ways to automatically contribute towards an IRA.

IRAs Need More Initiative from the Investor

Opening an IRA takes some initiative by the individual. This can be done through many channels but we have chosen to use TD Ameritrade/Schwab as the custodian for our clients’ IRA accounts. There are many flavors of IRAs; I’ll stick to the basics of a Traditional IRA and a Roth IRA in this blog post. In short, a Traditional IRA is considered a “tax-deferred” vehicle, and a Roth IRA is considered a “tax-free” vehicle. Keep in mind that very few things are truly tax-free and that the money you contribute to a Roth IRA has already been taxed. However, the “tax-free” piece of it refers to the capital appreciation, dividends, and earnings that can be tax-free if you follow the IRS rules. You can think of the tax treatment similarly when it comes to the difference between a Traditional 401(k) and a Roth 401(k).     

IRAs are typically funded from your bank account or from a rollover from your former employer’s 401(k) plan. You (or your spouse) must have earned income to contribute to an IRA. Note that Traditional IRA contributions can be tax deductible, if you are eligible (it depends on if you’re covered by a retirement plan at work, tax filing status, and income). The tax code allows you to contribute more money in a given year to a 401(k) than an IRA (for 2023 you can contribute $22,500 to your 401(k) and $6,500 to your IRA unless you are over the age of 50 you can contribute $30,000 to the 401(k) and $7,500 to your IRA). It is worth noting that for 401(k) plans with profit-sharing, the maximum annual additions (which includes employer profit-sharing contributions to a participant’s account) in 2023 is $66,000 ($73,500 including catch-up contributions). A rollover contribution to a Traditional IRA or Roth IRA is not subject to the annual contribution limit (or vice versa: A rollover from an IRA to a 401(k) is not subject to the annual contribution limit). 

Investment Option Differences Between 401(k)s and IRAs

A couple of other differences between a 401(k) and an IRA are the investment options and the ability to take a loan from the account. IRAs will have greater investment options whereas with a 401(k) you are often stuck with the investment lineup that is provided by your advisor on your employer’s plan. Your investment options might be somewhere around 20 mutual funds versus an IRA that has access to thousands of investment options. Some 401(k) plans will offer the ability to take a loan from the account and pay it back, with interest. IRAs do not allow this.

For the sake of keeping this a blog post vs. an all-out white paper, I decided to pick a few of the common topics that come up frequently in my conversations. There are other differences that might be worth considering when determining your strategy of how to divvy up your contributions to your 401(k) or your IRA (or a hybrid of utilizing both). Know that you are not alone in asking questions about the differences between these two common forms of retirement vehicles!

ABOUT THE AUTHOR

Mitch DeWitt, CFP®, MBA

FINANCIAL ADVISOR

Mitch DeWitt is one of the co-founders and managing partners of Walkner Condon Financial Advisors. He is a fee-only, fiduciary financial advisor who works with clients locally in Madison and around the country.

What Should I Do With My Old 403(b)? 5 Options to Consider

What Should I Do With My Old 403(b)? 5 Options to Consider

You may have recently changed jobs and are wondering, “What should I do with my retirement account that was established through my former employer’s retirement plan?”

Related Reading: What to do With Your Previous Job’s 401(k) Plan

If you work for a university, public school, or a 501(c)(3) tax-exempt organization (more commonly referred to as a charitable organization or nonprofit), you may have participated in a 403(b) plan. A 403(b) is similar to a 401(k) in many ways. It is a defined-contribution plan that offers an opportunity for an employee to save and invest for retirement in a tax-deferred manner. Some 403(b) plans offer a Roth feature, as well. Roth contributions are taxed in the year of the contribution with the promise of tax-free withdrawals (assuming the withdrawal is considered a qualified distribution).

Five Options For the 403(b) From Your Previous Employer

So let’s get to the reason why you’re probably here – options for the 403(b) from your previous employer. You have several options on what can be done with your old 403(b):

  1. Do nothing
  2. “Roll” the 403(b) into an IRA
  3. “Roll” the 403(b) into your new employer’s retirement plan
  4. Cash it out
  5. A hybrid of these options

1. Do nothing

You can keep the account where it’s at. It will continue to stay invested in the mutual funds or the annuity contract within the 403(b) plan. You won’t be actively contributing to the account anymore, but the account value will still fluctuate (and hopefully grow over the long haul). Balances in the tax-deferred bucket will continue to be tax-deferred and balances in the Roth bucket will continue to be treated as Roth funds. In some cases when the account balances are very low, the plan may force the former employee to take the funds out of the 403(b) plan. If that is the case, there usually is a way to roll the funds into an IRA (see bullet point 2 below) at the same custodian where the 403(b) is held.

2. “Roll” the 403(b) into an IRA

Tax-deferred balances can be rolled into a Traditional/Rollover IRA. If done correctly, there is no taxable event when rolling the funds from the 403(b) to the IRA. Be aware of an “indirect rollover” which is required to withhold 20% upon sending the 403(b) funds out of the account (also known as a 60-day rollover). This is where unwelcome tax surprises can occur. Similarly, Roth balances can be rolled into a Roth IRA. Again, if done correctly there is no taxable event when rolling the Roth funds from your old 403(b) to the Roth IRA.

3. “Roll” the 403(b) into your new employer’s retirement plan

The IRS allows you to roll your old 403(b) into your new employer’s plan, whether it be another 403(b) or another qualified plan like a 401(k). However, just because the IRS allows it doesn’t mean that your new employer’s plan allows it. In other words, when your new employer creates a retirement plan, they are not required to have the plan allow incoming rollover contributions. That said, many plans allow rollover contributions. Both tax-deferred and Roth funds can be rolled into your new employer’s plan and will continue their respective tax treatment (i.e. tax-deferred stays tax-deferred, Roth stays Roth).

4. Cash it out

Generally, this isn’t recommended! However, it is an option. Unless there is a severe need for cash we do not recommend this when it comes to your long-term retirement goals. Generally speaking, the funds distributed will be taxed and penalized. There are additional variables that come into play here (hardship withdrawals, age of the employee, tax-deferred vs. Roth funds, basis vs. earnings, etc.) but that is beyond the scope of this blog post.

5. A hybrid of these options

You can rollover some funds and also perform a Roth Conversion of some of the funds, if you’d like (a Roth Conversion will be a taxable event). A Roth Conversion can be part of a complex planning strategy; make sure you talk to your professional advisors when considering this approach. You could also rollover some of the funds and take some of the funds in cash (taking the cash will be a taxable event). Again, taking a cash distribution before retiring generally isn’t recommended.

Where to from here?

Some of the scenarios above are pretty straightforward; others are not! Things to consider before making any changes include investment options available, fees, plan design (in the case of a qualified retirement plan), and consolidation needs. Chat with your financial advisor and your tax professional to determine what makes the most sense for your retirement plan and your individual situation. Please reach out if we can be valuable to you when it comes to your financial planning needs.

Mitch DeWitt, Certified Financial Planner™, MBA

What are the Limits for My Investing and Spending Accounts?

What are the Limits for My Investing and Spending Accounts?

As Spring springs and we approach the end of the first quarter of 2022, it is a good time to familiarize yourself with the changes to the more popular savings vehicles. It is imperative to understand the basics of these accounts to avoid mistakes, as the penalties can be quite onerous. This is not an exhaustive list, but it is a good place to start. 

The list is broken up into the appropriate categories of employer-sponsored plans, personal retirement plans, healthcare and spending accounts, and educational accounts.   

Employer-Sponsored Plans

401(k), 403(b), and most 457 plans have a new maximum employee contribution limit of $20,500, up from $19,500 in 2021. The overall maximum annual additions into defined contribution plans (which include 401(k) and 403(b) plans) increased from $58,000 to $61,000. 

Individuals aged 50 and older are allowed an additional $6,500 of contributions. Note that the “age 50 catch-up” amount did not increase from 2021 to 2022.

Personal Retirement Plans

IRA and Roth IRA contribution limits are unchanged at $6,000 for people under the age of 50 and $7,000 for individuals 50 years old and older. 

The traditional and Roth IRA income phase-out ranges are also increasing. 

Healthcare and Spending Accounts

Health Savings Account contribution limits increased from $3,600 to $3,650 for individuals and $7,200 to $7,300 for families. 

The HSA catch-up contribution for individuals 55 years old and older is an additional $1,000. This is unchanged from 2021.

The  Health Care Flexible Spending Account (FSA) limit has increased to $2,850 in 2022 – up from $2,750 in 2021.

The Dependent Care FSA limit in 2022 has reverted back to $5,000 for a married couple filing a joint tax return. The American Rescue Plan temporarily increased the limit to $10,500 in 2021.

529 College Savings Plan

529 plans do not have contribution maximums; however, contributions are considered completed gifts for federal tax purposes, and in 2022 up to $16,000 per donor ($15,000 in 2021), per beneficiary qualifies for the annual gift tax exclusion.

The Coverdell IRA contribution limit is $2,000 per student, per calendar year. 

The annual changes to contributions and income limits are not consistent year-over-year; therefore, understanding the changes and how they affect your specific situation is important. It is a good idea to check your contribution levels early in the year as payroll adjustments and/or automatic contributions into your IRA accounts may be required periodically. 

Nate Condon