Maximizing Retirement Savings: Balancing a 401(k) and Traditional IRA in 2023
Navigating the world of retirement accounts can be complex when maximizing your contributions across multiple plans. Employees who are lucky enough to have a 401(k) plan through their company may be wondering if they can also put money into a Traditional IRA and still get the tax benefits.
The good news is that you can, but you need to be aware of some IRS rules. For example, your modified adjusted gross income (MAGI) for 2023 will affect how much of your Traditional IRA contributions can be deducted.
Understanding Your 401(k) and Traditional IRA Options
First, let’s clarify what these accounts offer:
401(k) Plans:
These employer-sponsored retirement plans allow employees to save and invest a portion of their paycheck before taxes are paid.
In 2023, the maximum contribution limit was $22,500, and individuals aged 50 and above are eligible for an additional catch-up contribution of $7,500.
Traditional IRAs:
These are personal retirement savings accounts with tax advantages. Contributions may be tax-deductible, and the money in the account grows tax-deferred.
The contribution limit 2023 is $6,500, with an additional $1,000 catch-up contribution for those 50 and older.
The Interplay Between 401(k) and Traditional IRA Contributions
Contributing to a 401(k) and a Traditional IRA can maximize your retirement savings. However, if you’re covered by a workplace retirement plan like a 401(k).
In that case, the IRS sets income limits to determine whether your Traditional IRA contributions are tax-deductible.
2023 MAGI Limits for Traditional IRA Deductibility
For the tax year 2023, here’s how your ability to deduct Traditional IRA contributions is affected based on your MAGI:
Single filers or heads of household:
If your MAGI is $73,000 or less, you can fully deduct your Traditional IRA contributions. There are partial deductions that can be claimed for MAGI within the range of $73,000 to $83,000. Above $83,000, you cannot deduct your contributions.
Married filing jointly (when you’re covered by a workplace plan):
Full deduction if your MAGI is $116,000 or less. Partial deductions are allowed for MAGI between $116,000 and $136,000. No deduction is available for MAGI above $136,000.
Married filing jointly (when your spouse is covered by a workplace plan):
Full deduction if your MAGI is $218,000 or less. Partial deductions are available for MAGI between $218,000 and $228,000. Above $228,000, you cannot deduct your contributions.
Married filing separately:
If you file separately and live with your spouse at any time during the year, the phase-out range is minimal: $0 to $10,000.
Strategies for Maximizing Your Contributions
If you find that your MAGI is too high to fully take advantage of Traditional IRA deductions, don’t be discouraged.
You can still contribute to a Traditional IRA without having to worry about taxes being taken out, or you could contribute to a Roth IRA if your income is low enough.
Final Thoughts
Contributing to both a 401(k) and a Traditional IRA can significantly enhance your retirement nest egg. The 2023 MAGI limits might change how much your Traditional IRA contributions you can deduct from your taxes.
However, it is essential to remember that retirement savings is a long-term goal, and every contribution counts. Consult with a financial advisor or tax professional to tailor a retirement savings plan that best suits your needs and maximizes your tax advantages.
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This article is designed to inform readers about their options for contributing to both a 401(k) and a Traditional IRA. It focuses on the specific MAGI limits for 2023 that affect the deductibility of Traditional IRA contributions.
It aims to provide a clear understanding while encouraging readers to seek personalized advice for their unique financial situations.