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