Why Young Employees Should Consider 2023 Roth IRA Contribution and Perhaps Benefit from IRS’ Savers Tax Credit
The following table summarizes the MAGI limits for individuals who want to make a Roth IRA contribution for 2023:
| Tax Filing Status | Can Contribute at the Maximum Limit if 2023 MAGI Is Not More Than… | Can Contribute at a Reduced Limit if 2023 MAGI Is Between… | Cannot Contribute if 2023 MAGI Is Above…. |
| Single or Head of Household
Married Filing Joint Married Filing Separate |
$138,000
$218,000 $0 |
$138,001 – $153,000
$218,001 – $228,000 $0 – $10,000 |
$153,000
$228,000 $10,000 |
One advantage of making 2023 Roth IRA contributions between now and April 15,2024 is that by now most employees know what their 2023 MAGI is. If they determine that their 2023 AGI is too large (as shown in Table 1) they should not make a Roth IRA contribution for 2023,
What happens if an individual has already filed his or her 2023 federal income tax return after making a2023 Roth IRA contribution and discovers that the contribution should not have been made because their 2023 MAGI was too large? In that case, the individual needs to contact their Roth IRA custodian before April 15,2024 and request a refund of their contribution and any accrued earnings. The refunded contributions will not be taxable because the contributions were made with after-taxed dollars. The accrued earnings will be taxable income for the year 2024, but not subject to a 10 percent early withdrawal penalty.
Finally, for those younger federal employees who contribute to a Roth IRA and /or a traditional IRA for 2023, there is a tax credit called the Saver Tax Credit that can be claimed on the employee’s 2023 federal income tax return if the employee qualifies. The maximum credit is $1,000 per person and is based on decreasing scale based on the employee’s AGI. The credit rate is from 10% to 50% based on AGI, as shown in Table 2 below:| Current Rate | Married Filing Joint | Head of Household | Single, Married Filing Separate or Qualifying Widow |
| 50% of eligible contributions | AGI of no more than $43,500 | AGI of no more than $32,625 | AGI of no more than $21,750 |
| 20% of eligible contributions | $43,501 -$47,500 | $32,626 – $35,625 | $21,751 – $23,750 |
| 10% of eligible contributions | $47,501 – $73,000 | $35,626 – $54,750 | $23,751 – $36,500 |
| 0% of eligible contributions | More than $73,000 | More than $54,750 | More than $36,500 |
The following example illustrates:
Julie, age 25, entered federal service in October 2023 after graduating from college. Her AGI for the year 2023 was $19,500 (she contributed $5,000 to the traditional TSP which reduced her taxable salary and total income by $5,000). Julie contributed $2,000 to a Roth IRA for the year 2023. Because Julie’s 2023 AGI is less than $21,750, Julie is entitled to a 50% of $2,000 or a $1,000 Saver Tax Credit for the year 2023. Julie decides to use the $1,000 tax credit to increase her 2023 Roth IRA contribution from $2,000 to $3,000.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
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