Maximizing your Retirement Savings: Understanding Adjusted Gross Income (AGI)

When it comes to retirement savings, understanding how contributions to different accounts affect your Adjusted Gross Income (AGI) is crucial. Let's take a look at the scenario of Sally, a 45-year-old single individual with no dependents who earned $58,020 in wages in 2023 and contributed $3,399 to a Roth IRA.

Explanation:

In Sally's case, the contribution of $3,399 to a Roth IRA does not impact her AGI for 2023. This is because Roth IRA contributions are made with post-tax income, meaning they do not reduce your taxable income. As a result, Sally's AGI remains at $58,020, which is the total amount of her annual wage earnings.

It's important to note that while traditional IRA contributions can lower your taxable income and subsequently decrease your AGI, contributions to a Roth IRA do not have the same effect. This distinction is crucial for individuals like Sally who are looking to maximize their retirement savings while understanding the tax implications of their contributions.

Overall, contributing to retirement accounts such as IRAs and 401(k)s plays a significant role in helping individuals secure their financial future. While contributing to a Roth IRA may not impact your AGI, the long-term benefits of saving for retirement far outweigh any short-term considerations.