Funding limits increase to offer additional savings opportunity
With inflation on the rise, the Internal Revenue Service is offering some relief to investors by increasing their opportunity to save for retirement in tax-advantageous environments. The IRS recently released its inflation-adjusted contribution limits for 2023, which brings not only a lift in the salary deferral limit, but IRAs, Roth IRAs and profit-sharing plan annual limits as well.
The IRS announced that employees in 401(k) plans will be able to contribute up to $22,500 this year, an increase of $2,000 from 2022. If you are over 50, you can make an additional $7,500 catch-up contribution. The income ranges for determining eligibility to make deductible contributions to Roth IRAs will also increase for 2023.
This and other changes in Notice 22-55 provide cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2023.
Key changes for 2023
- 401(k) salary deferral limit at $22,500 per individual 401(k)
- 401(k) catch-up contributions at $7,500 for those over 50
- Profit Sharing Plan annual limit increased to $66,000
- IRA annual contribution limit increased to $6,500
- Health Savings Account (HSA) contribution limits increased to $7,750 for family coverage and $3,850 for individual
Stayed the same:
- HSA catch-up contributions at $1,000 for those over 55 for both single and family
- IRA catch-up contributions at $1,000 for those over 50
Other notable changes:
In 2023, the adjusted gross income (AGI) phase-out range for taxpayers making contributions to a Roth IRA has increased. The Roth IRA phase-out range is $218,000 to $228,000 for married couples filing jointly, up from $204,000 to $214,000 in 2022. For singles and heads of household, the income phase-out range is $138,000 to $153,000, up from $129,000 to $144,000 in 2022.
If you earn too much to open a Roth IRA, you can open a nondeductible IRA and convert it to a Roth IRA as Congress lifted any income restrictions for Roth IRA conversions, which is known as this Roth “Back Door” strategy.
Making the most out of tax-advantaged savings environments is an essential component of your long-term savings strategy. Podcast hosts Hunter Satterfield and Judson Crawford go into detail on how the new contribution limits and adjusted income limits can change your strategy.
Catching up on 2022 IRA contributions:
If you stalled your normal contributions, or didn’t save as much as you’d hoped, it’s not too late to catch up on your 2022 savings.
2022 IRA contributions can be made until April 18, 2023. If you happen to exceed the 2022 IRA contribution limit, you may withdraw excess contributions and any income earned on the excess contribution from your account by the due date of your tax return (including extensions). If you do not, you must pay a 6% tax each year on the excess accounts left in your account.
Consider adjusting your savings goals to increase your savings and maximize your contributions in 2023. These annual increases are just one more savings opportunity that are essential to accumulating wealth; it is wise to take advantage of the maximum benefit allowed under the law.