A qualified retirement plan is an employer-sponsored retirement plan that satisfies requirements in the Internal Revenue Code for receiving tax-deferred treatment. These include defined contribution plans like the TSP, 401k, 403(b), and 457(b).
These plans allow a contribution limit of up to $22,500 of your salary this year and will increase to $23,000 in 2024. In the year you attain age 50, you can increase the amount you save with catch-up contributions up to $7,500. The catch-up contribution limit is the same in 2023 and 2024.
An IRA is a personal savings plan that lets employees and the self-employed set money aside for retirement. The limit on annual contributions to an IRA increased to $7,000 in 2024, up from $6,500 in 2023 — that limit applies to the total amount contributed to your traditional and Roth IRAs. All IRA plans also allow catch-up contributions for individuals aged 50 and over — that remains $1,000 for 2023 and 2024.
If you or your spouse already are contributing to the TSP or another qualified employer-sponsored plan, your income levels may limit the amount you can claim as a deduction for a traditional IRA. The income limits vary according to your tax filing status and are on a sliding scale from being able to take a full deduction or no deduction for a traditional IRA.
If you elect to have a Roth IRA there are no tax deductions and your contribution limits will be based on income. For single filers, the amount you are allowed to contribute begins to phase out when your Modified Adjusted Income (MAGI) exceeds $138,000. For joint filers, the phase-out will begin when the MAGI exceeds $218,000.
There is a significant difference, however, between a qualified retirement plan and an IRA about the contribution time window. You have to make your contributions for qualified plans before the end of the calendar year. You have more flexibility, however, with IRAs.
An IRA must be established and its contributions in place by the tax filing deadline (without extensions) for the tax year in which your qualifying contribution(s) will apply. For example, next year, you can contribute toward your 2023 tax year IRA until April 15, 2024.
This means that in 2024 when you are preparing your documentation for your 2023 taxes and reviewing the process it may be an opportunity to lower your taxes by making a tax-deductible contribution to a traditional IRA or a Roth IRA contribution, or even a combination, should your MAGI allow it.
Reasons to Consider Funding an IRA
Here are some scenarios in which you may want to consider establishing and funding an IRA before you file your taxes for 2023.
- Did you not contribute to your TSP? It is not too late for an IRA.
- Did you join the workforce late in the year and wish you could have made more TSP contributions? An IRA can help you jump-start your retirement savings.
- Were all your TSP contributions either traditional or Roth? An IRA can offer tax diversification.
- Would you like to open a traditional and a Roth IRA? You can do so but the combined total cannot exceed the $6.500 contribution and $1,000 catch-up limits for 2023.
- Did you marry? Even if your spouse had no income, he or she could have a spousal IRA.
- Do you have money you would like to invest before filing your taxes? As long as you have enough taxable compensation, both traditional and Roth IRAs offer tax-deferred growth and traditional IRAs may offer a tax deduction.
- Would you like more investment diversity than the TSP choices offer? IRAs offer an expanded source of investments beyond the TSP choices.
- Do you want a bigger tax return? Consider a traditional IRA if the deduction is suitable for you.
- Do you want more tax-free income in retirement? Consider a Roth IRA.
- Paid off your student loans? Celebrate by starting an IRA.
- Retired in 2023? It’s not too late to fund an IRA before filing taxes.
If you are making 2023 IRA contributions after Jan. 1, 2023, specify that it’s for 2022 with your IRA custodian. This will avoid possible confusion. All mailed-in IRA applications and contributions must be postmarked by April 15th to be accepted for the prior tax year.
This article is for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any investment transaction.
