IRS: 401(k) and IRA Contribution Limits to Increase in 2023
For the year 2023, the IRS has announced an increase in the contribution limits for 401(k) plans and individual retirement accounts (IRAs).
The IRS has announced that beginning in 2023, young workers will be able to contribute up to $22,500 pre-tax to a 401(k) or similar retirement savings plan, a $2,000 increase from the current cap of $20,500. Individuals of retirement age can now save up to $30,000, a $3,000 increase; this includes a $7,500 "catch-up" contribution, up from $6,500 in 2022. As a result, employees who are currently contributing the maximum amount and have the ability to save more will be able to effectively offer themselves a tax break.
The IRS also announced that the contribution limit to a pre-tax or Roth IRA will increase to $6,500 in 2023, up from $6,000. Those aged 50 and up are eligible to make a $1,000 catch-up IRA contribution (this amount is not adjusted for inflation). Meanwhile, in 2023, the annual limit an employee can contribute to a Simple IRA Plan (a retirement program designed for small businesses) will increase to $15,500 from the current $14,000. With the inflation rate at a 40-year high, the contribution limits were expected to rise. Mercer claims that the limit increases are the largest in history. (Inflation was this high the last time automatic adjustments were not included in the tax code.)
The Internal Revenue Service announced a series of cost-of-living adjustments recently, including increased standard deductions and tax brackets, as well as larger taxable gifts and estates. The Social Security Administration also announced 8.7 percent cost-of-living adjustments for 2023, which will automatically increase benefits for 70 million Americans.
The IRS outlines all of the changes to retirement plans in Notice 2022-55.
Here's more information on the changes to retirement plans that will take effect in 2023:
Employee contributions to a 401(k) plan, as well as similar plans offered by non-profit and government organizations including 403(b) plans, most 457 plans, and the federal government's Thrift Savings Plan for workers, are subject to the new limits of $22,500 and $30,000.
There is also a limit on how much can be put into an employee's 401(k) each year, including employer contributions. Younger workers' pay will increase from $61,000 to $66,000, while older workers' pay will increase from $67,500 to $73,500. Some plans allow workers to put in more money to reach the limit, so this number may be important to the highest-paid workers. Top-up contributions can only be made with previously taxed funds. They do not go into a Roth.
Contributions made before taxes lower your current tax bill and grow tax-free, but all withdrawals made after retirement are taxed (with certain exceptions for money transferred directly to charity). Roth contributions are made after taxes are deducted, and the money is not taxed when withdrawn in retirement. Earnings from after-tax contributions are only tax-deferred; only the contributions themselves are tax-free.
IRA Contributions And Income Limits
The maximum amount you can put into an IRA has increased from $6,000 to $6,500, but that isn't the only number that has been adjusted to account for inflation. If you don't have a workplace retirement plan or your income is below a certain threshold, you can't make a tax-deductible contribution to an IRA. The deduction will be phased out in 2023 for single taxpayers earning $73,000 to $83,000 (up from $68,000 to $78,000) and married couples filing jointly earning $116,000 to $136,000 (up from $109,000 to $129,000). If your spouse has a workplace plan but you do not, your IRA deduction will phase out in 2023 between $218,000 and $228,000. This range was between $204,000 and $214,00 in 2022.
Simultaneously, the income limits for contributing to a Roth IRA, which are higher than those for a pre-tax IRA, are increasing dramatically. ( The contribution limit for a pre-tax IRA and a Roth IRA is $6,500/$7,500, respectively. Because of their flexibility, Roth IRAs are frequently regarded as good investment vehicles. You can always withdraw your original Roth IRA contributions without paying tax penalties, as you would if you took money out of another account before retirement. Young savers can, in fact, use Roth IRAs as emergency savings accounts.
In 2023, the income limit for Roth IRA contributions rises from $129,000 to $144,000 to $138,000 to $153,000. The phase-out range for this year was $204,000 to $214,000. It will rise from $218,000 to $228,00 next year.
SEP IRAs and Solo 401(k)s
These plans are designed for those who work for themselves or own small businesses. The maximum amount you can save in a SEP IRA in 2022 will be $61,000. That figure will rise to $66,000 in 2023. This is an employer contribution calculated on total earnings. A self-employed person can now contribute up to 20% of their income up to $330,000, up from $305,000 in 2022.
The total amount you can put into a Solo 401(k), which is a 401(k) for self-employed individuals, is increasing from $61,000 to $66,000 for those under 50, and from $67,500 to $73,500 for those 50 and older. That is the same as the general 401(k) limit. The employee contribution is one component, and it has the same limits as any other 401(k) plan: $22,500 in 2023 for workers under 50, and $30,000 for those 50 and older. The other component is the employer's contribution, which is based on your earnings. One advantage of a Solo 401(k) is that the employee contribution component allows self-employed people to save significantly more money with less income than they could with a SEP IRA. Another advantage is that people over the age of 50 can contribute to their Solo 401(k) but not to their SEP IRA.
Related: Should I Save in a 401(k)?
This is a tax credit that helps low- and middle-income workers in saving for retirement by matching a portion of their contributions to an IRA or workplace plan (at a rate ranging from 10% to 50%). As a taxpayer's income rises, so does the credit. In 2023, the credit will end at $73,000 for married couples filing joint returns, up from $68,000; $36,500 for singles and couples filing separately, up from $34,000; and $54,750 for heads of household, up from $51,000.
Defined Benefit Plans
Congress has set up (and adjusted for inflation) a cap on how much of a worker's salary can be used to determine his future benefit. This influences how much money can be put into a plan for that employee. The most that person can earn in 2023 is $265,000. It was $245,00 in 2022. Although the use of defined benefit plans has declined in large corporations, older small business owners are increasingly utilizing custom designed defined benefit plans to save large sums of money before taxes.
In 2023, the maximum amount you can put into a qualified longevity annuity contract from your IRA or 401(k) will increase from $145,000 to $155,000. A QLAC provides you with money in the future. It is viewed as a way to ensure that you do not run out of money or have to pay for long-term care later in life. The lifetime limit of $155,000 is not a yearly limit.
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This post is just for informational purposes and is not meant to be legal, business, or tax advice. Regarding the matters discussed in this post, each individual should consult his or her own attorney, business advisor, or tax advisor. Vincere accepts no responsibility for actions taken in reliance on the information contained in this document.