The IRS has announced new contribution limits for tax-advantaged retirement plans. Here's what to know about IRA and Roth 401(k) contribution limits for 2023.
Income phaseouts for IRAs also increased for 2023
Every year, the Internal Revenue Service (IRS) reviews inflation and other factors to determine the contribution limits for tax-advantaged retirement plans. Some years they remain unchanged. But other years, the IRS makes cost-of-living adjustments (COLAs) to the amount you can set aside in your 401(k) and individual retirement account (IRA).
For 2023, the changes have been significant. Here’s what you need to know about 401(k) and IRA contribution limits for 2023 and how you can make the most of your retirement savings.
For the coming year, the IRS has raised the contribution limit on your IRA to $6,500, up from the previous $6,000.
Keep in mind that the contribution limit applies to all your combined IRAs, so if you have a Roth IRA and a traditional IRA, your combined contributions to both accounts can’t exceed $6,500. The catch-up contribution for those 50 and older is not subject to COLAs and remains the same at $1,000.
For 401(k)s, the 2023 contribution limit will increase to $22,500, up from $20,500 for 2022. This contribution limit also applies to 403(b) and most 457 plans and the federal government’s Thrift Savings Plan. The catch-up contribution available to those 50 and older is now $7,500 up from the previous $6,500.
One benefit of a traditional IRA is you can typically deduct your contributions. However, if you have a retirement plan at your work, or if your spouse does, the ability to deduct your IRA contributions phases out depending on your income and filing status. When you reach a certain income level, you can still take a deduction, but not the full amount. After you reach the upper phaseout limit, you can’t claim a deduction at all for IRA contributions.
In 2023, the income restrictions are:
If you have a plan from your workplace, most likely a 401(k), you have a better chance to claim a deduction for contributions to an IRA, providing a greater incentive to use more than one type of a tax-advantaged retirement account.
It’s important to note the income limits for Roth IRA contributions have also increased slightly for 2023. You can contribute to a Roth IRA with income phaseouts based on your income and filing status.
If you’re married and filing separately, the income phaseout range for making Roth IRA contributions remains zero to $10,000.
If you have the flexibility to take advantage of the higher IRA and 401(k) contribution limits as well as the increased catch-up amounts for those older than 50, that’s at least one good side to our inflationary times.
If you aren’t maxing out your retirement account contributions, you do have room to increase what you set aside. Consider speaking with your human resources department about having a little more taken out of each paycheck and diverted to a 401(k) or IRA. Although it might not seem like much today, when compound returns are figured over the course of decades, the extra boost could make a significant difference to your overall portfolio.
Another strategy, if you qualify, is to consider contributing to a Health Savings Account (HSA) to take advantage of those tax benefits. Additionally, when used as part of a retirement strategy, your HSA can help you pay for health care costs or even serve as a backup IRA when you reach age 65.
Consider speaking with a retirement consultant about how you can make the most of your future based on the types of accounts you’re qualified to contribute to. In some cases, a strategy that uses both traditional and Roth accounts, in addition to a 401(k), can increase the overall tax efficiency of your retirement portfolio. A holistic approach can help you make sure your retirement goals fit with your other financial objectives. Consider sitting down with a retirement professional for an outside perspective on your approach and to help keep you on track.
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