Contribution Limit Increases for 2023: Just What We Wanted to Hear

In late October, the IRS announced that it is increasing contribution limits to retirement savings accounts in 2023. The changes, like many you are seeing, are a direct result of months of high inflation and financial uncertainty, some of these cost-of-living-based adjustments have reached near-record levels. 

Here’s an overview of the changes: 

• IRAs¹
  
  
• The IRS also increased the 2023 contribution limit for individual retirement accounts (IRAs). Individuals will be able to increase contributions by $500 for a total of $6,500. That’s more than an 8% rise from the 2022 limit.
  
  
• You need to be aware that the $1,000 catch-up contribution limit for IRAs is not pegged to inflation, so it is not being changed.
  
  
• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out income range to take advantage of tax deferral is increased to between $218,000 and $228,000, up from between $204,000 and $214,000.
  
  
• At the same time, the tax phase-out range for single people went up to a range of $138,000 to $153,000 from $129,000 to $144,000. For married couples, filing jointly, it will increase in 2023 to a range of $218,000 to $228,000 from $204,000 to $214,000.
  
  
• Once you reach age 72 you must begin taking required minimum distributions from your 401(k) or other defined-contribution plans in most circumstances. Withdrawals are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. 

• Roth IRAs¹
  
  
  • As with regular IRAs, the contribution limits for Roth IRAs were also increased by $500, raising the amount you can invest to a total of $6,500. This reflects more than an 8% rise from 2022's limit.
    
    
  • The eligibility threshold for investing in a Roth IRA has also been increased, allowing more people to take advantage of this important retirement strategy. In 2023, the adjusted gross income for an individual must be below $153,000, up from $144,000 this year. The income limit for joint filers was raised from $214,000 to $228,000.
    
    
  • To qualify for the tax-free and penalty-free withdrawal of earnings, Roth 401(k) distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawals can also be taken under certain other circumstances, such as the owner's death.

• SIMPLE IRA Plans¹
  
  
  • Employees who are participants in an employer-sponsored SIMPLE IRA plan can contribute $15,500 for 2023, an increase of $1,500 from the 2022 contribution limit of $14,000. Additionally, the SIMPLE IRA catch-up contribution limit for employees aged 50 and over was increased to $3,500, up from $3,000.
    
    
  • Much like a traditional IRA, once you reach age 72, you must begin taking the required minimum distributions from a SIMPLE account in most circumstances. Withdrawals are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. 

• 401(k), 403(b), and most 457 plans
  
  
  • The contribution limit for employees who participate in 401(k), 403(b), and most 457 plans, increased to $22,500, up from $20,500.
    
    
    • Participants who are 50 and older can contribute up to $30,000.
      
      
    • The catch-up contribution limit for employees aged 50 and over increased to $7,500, up from $6,500.
      
      
    • Once you reach age 72 you must begin taking required minimum distributions from your 401(k) or other defined-contribution plans in most circumstances. Withdrawals are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.
      
      
      
• Defined Contribution Plans¹
  
  
  • The limitation for defined contribution (DC) plans under Section 415(c)(1)(A) has been increased for 2023 from $61,000 to $66,000.
    
    
  • The limitation used in the definition of “highly compensated employee” under Section 414(q)(1)(B) was increased from $135,000 to $150,000.
    
    
    
• Defined Benefit Plans¹
  
  
  • Effective January 1, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) of the Internal Revenue Code (IRC) will increase from $245,000 to $265,000.

Keep in mind that this update is for informational purposes only, so please consult with an accounting or tax professional before making any changes to your 2023 tax strategy.

Other IRS changes²

The IRS has announced some other inflation-based rule adjustments for the 2023 tax year, including shifts for tax brackets and an increase in the standard deduction.  

While the tax brackets are staying the same, the income cut-offs have been increased. This is an attempt to avoid “bracket creep” that can happen when salary increases that are intended to reflect the higher cost of living, end up pushing taxpayers into higher tax brackets. This means that for the 2023 filing season, the top rate of 37 percent will now apply to individual single taxpayers with income over $578,125 and married couples filing jointly with income over $693,750. This is up from last year’s $539,900 and $647,850. This is good news as it means fewer people will be subject to the highest tax bracket.

At the same time, next year’s standard deduction will be increased. It will go up by $1,800 for married couples filing jointly, by $1,400 for heads of households, and by $900 for single taxpayers and married taxpayers filing separately.

Maxing Out Contributions

Being able to save and invest nearly 10% more for retirement in 2023 is a positive development that may be welcome news to some. But others may not be in a position to take advantage of these higher limits and catch up contributions. Keep in mind that when you increase your contribution, you are committing to a process of investing a fixed amount of money in an investment vehicle at regular intervals, usually monthly, for a  period of time regardless of price. If you do decide to bump up contributions, you should evaluate your financial ability to continue making purchases through periods of declining and rising prices. 

If you are uncertain about whether to take advantage of the higher limits, let’s meet so we can see how that would fit into your overall strategy. I’d also love to talk with your tax professional to help ensure we are all on the same page and that your tax strategy is aligned with your overall financial approach.

¹Plansponsor.com, October 21, 2022

²Thehill.com, October 18, 2022

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