In October of 2022, the Internal Revenue Service (IRS) announced that the amount individuals can contribute to 401(k) and IRA plans will increase. Why? The IRS is increasing the contribution limits in order to adjust to inflation. The contribution limit changes reflect cost of living changes from this year.
In this blog, we’ll break down these plans, the limit increases and dive into what these changes mean for taxpayers. Let’s get started.
401(k), 403(b), and Most 457 Plan Increases
The 401k is a retirement savings plan that is sponsored by an employer. Employees who participate in a 401k plan can choose to have a portion of their paycheck deducted and deposited into their 401k account. The money in a 401k account grows tax-deferred, which means that you will not pay taxes on the money until you withdraw it in retirement. 401k plans also offer a variety of investment options, which can make them a good choice for people who want to have more control over their retirement savings.
According to the IRS, for 2023, “the amount an individual can contribute to a 401(k), 403(b), and most 457 plans increases to $22,500, up from $20,500 in 2022. The catch-up contribution amount, for employees 50 and older who participate in these plans, increases to $7,500 from $6,500.”
That’s $2,000 – or roughly 9.8% – more than the current $20,500 federal contribution limit.
The catch-up contribution in the 401(k) and other workplace plans or, the amount plan participants who are 50 and older may save on top of the federal contribution limit, will also be raised.
In 2023, this limit will rise to $7,500 – up 15.4% from $6,500 today. What does this mean for taxpayers? If you’re 50 or older, you can contribute up to $30,000 in 2023 (not including any matching contributions your employer may add).
IRA (Individual Retirement Accounts) Limit Increases
An IRA is an individual retirement account that is not sponsored by an employer. Anyone can open an IRA, regardless of whether they are employed. Like a 401k, the money in an IRA grows tax-deferred, and you will not pay taxes on the money until you withdraw it in retirement. IRAs also offer a variety of investment options as well.
The limit on annual contributions to an IRA will increase from $6,000 to $6,500. The IRA catch up contribution limit for individuals age 50 and over is not subject to an annual cost of living adjustment and remains $1,000.
Income limits for Roth IRA contributions will increase in 2023 as well. The income phase-out range for Roth IRAs will be between $138,000 and $153,000 for single filers and heads of household (up from between $129,000 and $144,000).
The range for married couples filing jointly goes up to $218,000 to $228,000 (from between $204,000 and $214,000). The phase-out range for married individuals filing separately remains at $0 to $10,000.
Additionally, if you personally don’t have access to a workplace plan but your spouse does, then your modified AGI must be less than $228,000, up from $214,000 currently, to get some deduction for your IRA contributions.
What Do These Increases Mean for Taxpayers?
It may be time to up your 401(k) and IRA contributions and take advantage of these increases. Even if you can only contribute a small amount, it’s important to get started. The earlier you start saving, the more time your money has to grow through compounding interest.
Learn why you should start saving for retirement early, here.
Retirement planning can be confusing, but opening a 401k and/or an IRA can have many benefits for any individual.
Not sure where to start? We got you covered.
The purpose of RWM Financial Group is to promote plan success via our knowledgeable team and a robust set of tools. By working with us, you can help put your employees on the path working toward a secure retirement.
RWM will lead the way toward retirement readiness for pre-retirees and new generations of employees—whose success comes from your plan’s success. Combining professional dedication, cutting-edge tools, and high-impact education with a commitment to service, RWM Financial Group’s process sets a clear direction toward retirement for your valued employees and balances their needs with yours. The RWM process uses features and services that strive to create value for the employee and the employer.For a better understanding of retirement savings plans read our article here.