Contribution limits do not go up every year. But every couple of years, we’ve come to expect gradual increases across the various types of accounts. The Internal Revenue Service has just released new limits for the coming year.
For the most part, the amount of increases are linked to inflation. So perhaps it does not come as a complete shocker, because we’ve seen months of high inflation.
But the news is pretty big nonetheless: In 2023, people can add sizable increases to their retirement accounts.
Let’s review the changes.
Individual Retirement Accounts (IRAs)
IRA contribution limits for Traditional or Roth IRAs are up $500 in 2023 to $6,500. This is more than 8% higher than the current year level. Catch-up contributions for those over age 50 remain at $1,000, bringing the total limit to $7,500.
Traditional IRA Deductibility Criteria
Tax rules can let people deduct contributions to traditional IRAs so long as they meet certain conditions, pegged to issues like coverage through a workplace retirement plan and yearly income. Above phase-out ranges, deductions don’t apply if a person or their spouse has a retirement plan through work.
For 2023, a single taxpayer covered by a workplace retirement plan has a phase-out range between $73,000 and $83,000. That’s up from a range between $68,000 and $78,000 during 2022.
For a married couple filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to between $116,000 and $136,000. If an IRA saver doesn’t have a workplace plan but their spouse is covered, the phase-out range is increased to between $218,000 and $228,000.
Roth IRA Income Phase-out
Income levels may apply to those seeking Roth IRA contributions. The 2023 income phase-out range for Roth IRA contributions increases to $138,000-$153,000 for single filers and heads of household (up from $129k-$144k).
For married couples filing jointly, phase-out will be $218,000 to $228,000 (up from $204k-$214k). Married individuals filing separately see their phase-out range remain at $0-10,000.
Workplace Retirement Accounts
Those with 401(k), 403(b), 457 plans, and similar accounts will see a $2,000 increase for 2023, the limit rising to $22,500. This is an almost 10% increase from the 2022 limit of $20,500. Those aged 50 and older will now have the ability to contribute an extra $7,500, bringing their total limit to $30,000. Note: 457 plans have unique catch-up characteristics, so check with the plan administrator on those.
Here’s an example of the 401k increases over the past few years:
Catch-Up Contrib. (50+)
Total Potential Contributions
SIMPLE IRA Accounts
A $1,500 increase in limits for 2023 gives individuals contributing to this incentive match plan a $15,500 stop light. Employees who are 50 and older can make additional catch-up contributions of $3,500, making the total $19,000 potentially.
SEP IRA Accounts
SEP IRA contribution limits will increase to $66,000 per year for 2023, up from $61,000 per year in 2022.
In addition to changes in contribution limits, the IRS also announced several other changes for 2023. Included is an increase to the annual exclusion for gifts to $17,000 per person and an increase to the estate tax exclusion threshold.
Also notable are the increases regarding the Health Savings Account (HSA) and Flexible Savings Account (FSA). Single people can add $3,850 to HSAs and families can add up to $7,750 if their health insurance plan allows for it. FSA limits will be increased to $3,050 in 2023.
Last, the income limit surrounding the saver’s credit, which is geared toward low- and moderate-income households, is also getting a lift. The credit lets taxpayers claim 10%, 20%, or one-half of contributions to eligible retirement plans, including a 401(k) or an IRA. The 2023 income limit climbed to $73,000 for married couples filing jointly, $54,750 for heads of household, and $36,500 for individuals and married individuals filing separately.
One of the indirect benefits of high inflation is the increased limits. And as inflating costs of goods impact our ability to live in retirement, the increases are welcome. If cash flow allows for it, increased savings opportunities help us all reach our objectives more easily.
For those with 401k plans, including Solo 401k and Individual 401k, being able to add $66k (or $73,500 if age 50+) is huge. Imagine being able to put these amounts into Roth, and as much as $147k per couple!
Keep in mind that a percentage of your business/self-employment income is used to determine the amount you can contribute as the employer. The compensation used for this calculation increases to $330,000, which is $25,000 more than 2022. You may also make employer profit-sharing contributions up to 20% of your self-employment income (net Schedule C) or 25% of your W-2. Please note that these contributions can only be made pretax, and not Roth.
And if your employer allows for after-tax contributions, consider that as well. You can contribute after-tax funds up to the new annual limit of $66,000 or $73,500. After-tax contributions should generally only be considered when employing the Mega Backdoor Roth strategy.
Keep in mind that we provide updates for informational purposes only, so consult with your tax professional before making any changes in anticipation of the new 2023 levels. You can also contact our office, and we can provide you with information about the pending changes.