Latest 2023 Adjustments for 401(k)s and IRAs | Save More for Retirement
Out of the various pillars on which we build our estates, retirement accounts and investments are often our principal mechanism for building wealth. Retirement accounts in particular, are extremely important as they can often be built using contributions from outside sources (such as through employer contributions) or grow with certain tax advantages to maximize our potential payout at distribution. These perks do have some rules we have to follow, but the IRS just released the adjusted numbers for 2023 and they’re working in your favor.
401(k)s, 403(b)s, Most 457 Plans, and Thrift Savings Plan
Let’s start with the numbered plans: 401(k)s, 403(b)s, most 457 plans, and the federal government's Thrift Savings Plan. Your yearly contribution limit has been increased from $20,500 to $22,500. An increase of $2,000 per year, which may not sound like much, but of course, the idea is that all of this will compound over time. This also means if you have one of these plans and your employer does some type of matching contribution, then make sure to augment your contributions to ensure you hit the new max, considering your employer's contribution limits as well.
However, if you are over the age of 50, you are allowed to contribute more through, what are called, catch-up contributions. Previously, this meant you could save up an additional $6,500 per year. In 2023 however, this has also gone up to $7,500 per year. This means if you are over age 50 in 2023, you can contribute up to $30,000 into your 401(k), 403(b), 457 plan or federal Thrift Savings Plan.
Individual Retirement Accounts (IRAs)
Next, we'll discuss Individual Retirement Accounts, IRAs. Just like with the plans we've already discussed, the annual contribution limit has increased for 2023 to $6,500, up from $6,000. Yes, only $500, but the idea is that the extra $500 per year, year after year, will make a sizable difference when it comes time to begin taking out distributions.
One thing to note, however, while there is a catch-up contribution system for IRAs as well, it is only for an additional $1,000 per year, and is not subject to an annual cost-of-living adjustment and thus will remain $1,000 for the foreseeable future. That means if you are over age 50, then you should be contributing $7,500 to your IRA beginning in 2023.
Income Range Phaseouts for IRA Contributions
However, unlike the number plans discussed earlier, taxpayers are subject to an income range to determine their eligibility to make deductible contributions to traditional IRAs, Roth IRAs, and to claim the Saver's Credit (also known as the Retirement Savings Contributions Credit) for low and moderate income workers. For traditional IRAs, if you or your spouse are covered by a retirement plan at work, the deductible contribution may be reduced, or phased out, until it is eliminated, depending on filing status and income.
For single taxpayers covered by a workplace retirement plan, the phase-out range in 2023 will be between $73,000 and $83,000. For married couples filing jointly and the IRA contributor is covered by a workplace retirement plan, the phase-out range will be $116,000 to $136,000. For married couples filing jointly where the spouse is covered by a workplace plan, but the IRA contributor is not, the phase-out range is $218,000 to $228,000. For a married IRA contributor whose spouse is covered by a workplace plan, but files separately, the phase-out range remains between $0 and $10,000 as this range is not subject to an annual cost-of-living adjustment. Finally, if neither the contributor nor the spouse is covered by a workplace plan, the phase-out deductions do not apply.
Income Range Phaseouts for Roth IRA Contributions
Next, we have income phase-out ranges being adjusted for Roth IRA contributions as well. For single filers and heads of households, the phase-out range will now be between $129,000 and $144,000. For married couples filing jointly, the phase-out range is between $218,000 and $228,000. Lastly, the phase-out range for married contributors who file separately stays between $0 and $10,000.
Finally, for those interested in the Saver’s Credit, the income limit has been increased to $73,000 for married couples filing jointly, $54,750 for heads of household, and $36,500 for singles and married individuals filing separately.
Contribution limits for retirement accounts governed by law are going up across the board for 2023, meaning we can contribute more to these tax-advantaged accounts than we could previously. This means greater retirement growth potential, a more favorable tax rate when you begin pulling out money, and a larger potential nest egg or estate to build a legacy and to build generational wealth. And lastly, while it is a good rule of thumb to maximize those contribution limits before moving on to other investment vehicles, you should always talk to your financial adviser or tax planner for a complete understanding of your specific situation.
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