2023 Retirement Contribution Limits

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While the cost of goods and services have increased the past few years, one positive increase is to the 2023 annual retirement contribution limits. These amounts have been increased noticeably over the 2022 amounts, primarily a result of the increase in the cost of living over the past few years. These limits are discussed in more detail below and are dependent on the taxpayer having certain level of wages or self-employed income to maximize these amounts.

Defined Contribution Plans

If you are an employee who participates in a defined contribution plan, such as a 401(k), 403(b), most 457 plans, or the federal government’s Thrift Savings Plan, your contribution limit is increasing to $22,500 in 2023, up from $20,500 in 2022. Additionally, the catch-up provision for those employees who will be 50 years of age before year-end 2023 has also increased and is now $7,500 for these types of retirement plans. This means in 2023 if you turn the BIG 5-0 before the end of the year, you can contribute a possible $30,000 to your retirement plan – one perk for reaching this milestone!

In addition, there is an overall employee plus employer contribution limit for defined contribution plans, which has also been increased for 2023. This overall limit has increased to $66,000 for those 49 years old and younger and to $73,500 for those 50 and older for 2023.

Keep in mind, these limits are across all employers’ plans the taxpayer participated in during the year. If an employee has more than one job or changed jobs during the year where they participated in more than one defined contribution plan, the limits are in total across all plans, not per plan. This is true for both the employee deferral and the combined employee and employer limit.

Individual Retirement Accounts (IRAs)

IRAs are often used as a retirement savings option when a taxpayer does not have another retirement plan available to them. They may also be used by those who do have a plan available to them, simply so that they can save even more towards retirement. IRA contribution limits have also increased in 2023 to $6,500, up from $6,000 in 2022. There remains a $1,000 catch-up provision for those 50 years old and up in 2023. These limits apply to both traditional and Roth IRA contributions.

There are a few things to note with regards to IRA contributions. Traditional IRA contributions may or may not be deductible on your tax return, depending on participation in other retirement plans. The ability to contribute to a Roth IRA will be limited, and eventually phased out, as your adjusted gross income increases. These limits are determined by the taxpayer’s filing status. These phase-out limits have also been increased in 2023 for most filing statuses. The phase-out range is between $138,000 and $153,000 for single or head-of-household taxpayers and between $218,000 and $228,000 for married filing joint taxpayers. For married filing separate taxpayers, the phase-out range remains unchanged between $0 and $10,000. Once a taxpayers adjusted gross income is above these thresholds, they are no longer permitted to contribute directly to a Roth IRA.

Other Retirement Plans

A SIMPLE IRA plan (Savings Incentive Match Plan for Employees) is a tool used by small business employers to allow employees and employers to contribute to a traditional IRA setup for employees. These limits have also increased in 2023, with the employee deferral amount being $15,500. The SIMPLE IRA also offers a catch-up provision that has been increased to $3,500 for 2023 for those 50 years and older.

A SEP plan (Simplified Employee Pension) is a plan established by any employer, including self-employed individuals. The 2023 for this plan has also increased to the lesser of 25% of compensation or $66,000, up from $61,000 in 2022. Because SEP contributions are funded by employer contributions only, there is no catch-up provision for those 50 years or older.

Takeaways

Retirement contributions can serve as a valuable tax planning tool, as well as a great way to save for your future. Understanding upcoming limits can assist in budgeting your contribution amounts for 2023. Also, it is not too late to fund some 2022 retirement plans, as some of these options can be established and funded after year-end 2022.

Also, as a result of the Secure Act 2.0 being signed into law by President Biden on December 29, 2022, catch-up contributions (for those 50 and older) across many employee retirement plans will be required to be treated as Roth (i.e., after tax) contributions beginning in 2024. This means the catch-up portion will be contributed to an after-tax account regardless of whether the normal contribution is traditional or Roth based. This change will apply to any participant whose wages for the prior year exceeded $145,000. In addition, if an employer’s plan has any participants subject to the mandatory Roth provision, the plan must offer all participants (50 or older) the option to make their catch-up contributions as Roth contributions.

If you have questions regarding your retirement contribution options, please consult your tax advisor to discuss further.

 

By Suzanne Miller

SECURE Act 2.0

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On December 29, 2022, President Biden signed into law what is commonly called The SECURE (Setting Every Community Up for Retirement Enhancement) Act 2.0.  This Act builds upon the original SECURE Act that was passed at the end of 2019.  Both Acts have created changes to enhance and encourage long-term retirement savings. While the SECURE Act 2.0 has many provisions that are set to become law over the next few years, this discussion will focus on the changes that will affect 2023.

Change to RMD Rules and Excise Tax Rate

The initial SECURE Act raised the Required Minimum Distribution (RMD) Age from 70½ to 72 and now the Secure Act 2.0 is raising it again.  Beginning January 1, 2023, the RMD age is now 73, and starting January 1, 2033, it will be 75.  For 2023, this is on all qualified plans (Traditional and Roth 401(k)s) and Traditional IRAs.  Roth IRAs do not follow the RMD rules and beginning in 2024 Roth 401(k) accounts will no longer have an RMD requirement either.

In addition to the change in age for the RMD, the excise tax that is charged if there is a failure to take an RMD has been reduced from 50% to 25%.  This is in effect for tax years beginning after December 29, 2022.

Additional Roth Options Available

Prior to the SECURE Act 2.0, the only option for employer matching and non-elective contributions were for them to be contributed on a pre-tax basis.  Now the employee has the option to have the employer match be contributed as a Roth contribution after-tax.  If this option is utilized, the employer match or non-elective contributions would result in additional compensation to the employee for the year the match is made.

In the past, SIMPLE and SEP IRAs did not have a Roth option available to them.  Beginning in 2023, these types of plans can now be Roths.

Solo 401(k) Establishment Date Extended

Solo 401(k) plans now can be setup for the tax year up until the filing deadline (without extensions) of the tax return.  In the past these plans had to be established by December 31st of the first plan year. This did not allow for post year-end tax planning with regards to retirement options for the small business owners for which this type of plan may apply.  With the newly established deadline, it allows the small business owners to decide if a solo 401(k) would be beneficial after their year-end books have been closed.  This section of the Act is effective for plan years beginning after December 29, 2022.

Penalty-Free Early Withdrawal Exceptions

Generally, to take distributions or withdrawals from a retirement plan, the participant must be at least 59 ½ years old or a 10% penalty is imposed on top of any tax that is calculated.  There are a few new penalty-free withdrawal exceptions in the Act, that will become effective over the next few years.  In 2023, these exceptions include federally declared disasters, terminal illness, expanded public safety officers, and corrected distributions of excess contributions.

The SECURE Act 2.0 provides permanent relief for early withdrawals that are taken by participants that are effected by federally declared disasters that occurred on or after January 26, 2021.  As such, this provision is retroactive.  The taxpayer must have their primary home in the declared area and have sustained economic loss as a result of the disaster.  The withdrawal must be taken within 180 days of the disaster.  The provision allows for distributions of up to $22,000 per participant, per disaster to be taken out without penalty and can be included in taxable income over three years.  These amounts can also be recontributed to a tax preferred plan within three years.  Another relief provided under this portion of the Act is an increase of the participant loan limit to $100,000, up from $50,000, for those taking out loans because of the federally declared disaster.

An additional penalty-free withdrawal provided by the Act is for terminally ill taxpayers.  This is effective for distributions made after December 29, 2022 to participants that are deemed terminally ill.  The participant must provide a certification by a physician that indicates the taxpayer has an illness or physical condition that is expected to result in death within 84 months of the certification.

Qualified Charitable Distributions

The 2.0 Act provides that the annual IRA Qualified Charitable Distribution amount, currently limited to $100,000, will be indexed for inflation going forward.  In addition, there is now a one-time gift opportunity available to make a qualified charitable distribution to a split-interest entity, such as a Charitable Remainder Unitrust, Charitable Remainder Annuity Trust, or Charitable Gift Annuity in the amount of $50,000.

Takeaways

SECURE Act 2.0 has numerous provisions that affect employees, employers, and plan administrators.  Understanding how this Act impacts your specific situation will be beneficial in planning for retirement savings and tax treatment both now and in the future.  Please contact your tax advisor and/or your financial advisor with questions on how these changes could affect you.

 

By Suzanne Miller

Research and Development Updates

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Research and Experimental Expenditures

The Tax Cuts and Jobs Act of 2017 (TCJA) brought about changes to the tax impact of research and experimental (R&E) expenditures for tax years beginning after December 31, 2021.  Taxpayers are no longer able to immediately expense R&E expenditures but instead must capitalize and amortize costs related to activities within the US over a five-year period.  Costs related to activities outside the US have a capitalization period of 15 years.  Amortization of all capitalized cost are limited in the first year.

This change is considered a change in accounting method and the IRS has issued guidance for how to make the transition.  This includes a simplified process for most costs.  As a result, certain statements and declarations must be made on the tax return in the year this change is implemented.

There has been considerable bipartisan support to delay the effective date or to completely repeal this change.  However, Congress was not able to enact any legislation by the end of 2022.  Many believe there could still be retroactive changes, but as of the date of this article, mandatory capitalization remains in place.  It may be advisable for businesses impacted by this change to extend their 2022 tax returns.

Research and Development (R&D) Tax Credit

The Inflation Reduction Act (IRA) increased the amount of the R&D tax credit that can be used to offset payroll tax costs for qualified small businesses.  The amount doubled with a new $500,000 maximum cap effective for tax years beginning after December 31, 2022.  In addition, the IRA now allows the credit to be used against the employer portion of both Social Security tax and Medicare tax.

To be able to claim these credits against payroll taxes, a company must meet certain requirements to qualify as a qualified small business.  These are:

  • Gross receipts must be less than $5,000,000
  • The taxpayer cannot have had gross receipts for any tax year proceeding the five taxable years ending in the current tax year
  • The payroll tax credit can be claimed for up to five years

R&D Tax Credits on Amended Returns and Other Proposed Changes to Form 6765

As of January 10, 2022, there are new disclosure requirements needed for claiming an R&D credit on an amended return.  The additional information needed for disclosure includes details about what activities were performed, who performed the research activities, what information each person discovered, etc.  The IRS extended a one-year transition period in which taxpayers have 45 days to perfect a claim for refund prior to the IRS’s final determination.

Additional proposed changes to Form 6765 include similar requirements to those needed in amended returns.  The IRS is seeking additional detail about qualified research activities.

We will continue to keep you up to date on any changes in legislation or new developments on these topics.  Please reach out to the Snyder Cohn team if you have any questions.

 

 

By: Cheryl Heusser