Savings

401(k) and other 2023 retirement savings limits jump by record amount

The Internal Revenue Service announced today that young workers will be allowed to contribute up to $22,500 before taxes to a 401(k) or similar retirement savings plan in 2023, a jump of $2,000 per compared to the current limit of $20,500. People 50 or older will be allowed to save up to $30,000, an increase of $3,000, which includes a “catch-up” contribution of $7,500, up from the $6,500 catch-up in 2022. This means that employees who already contribute the maximum and are able to save more will in fact be able to grant themselves a tax reduction.

At the same time, the IRS said, the limit on contributions to a pretax or Roth IRA will increase next year to $6,500, from $6,000 where it has been stuck for four years. People age 50 and older can make an additional $1,000 catch-up contribution to an IRA, a number that isn’t subject to inflation adjustments.

In the meantime, the maximum contribution an employee can make to a Simple IRA plan— a pension plan designed for small businesses — will increase to $15,500 in 2023, from $14,000 previously.

The increases in the contribution ceiling were largely anticipated since they are based on the rate of inflation, which is currently at its highest level in 40 years. According to benefits consultant Mercer, the limit increases are all the greatest ever. (The last time inflation was this high, automatic adjustments weren’t part of the tax code.)

Last week, the IRS released a series of other inflation adjustments, including standard deductions and higher tax brackets and increase in the amount of wealth which can be transferred free of gift or inheritance tax. The Social Security Administration also announced a 8.7% cost of living adjustment for 2023— an automatic increase in benefits for 70 million Americans.

The full set of IRS adjustments to pension plans is available here, at Notice 2022-55.

Here’s more of what you need to know about pension adjustments for 2023.

401(k) plans

The new limits of $22,500 and $30,000 apply to employee contributions that are made before tax or to a Roth account in a 401(k) plan, or similar plans run by nonprofit employers and government – 403(b) plans, most 457 plans and the federal government’s Thrift Savings Plan for workers.

There is also an overall limit (including employer contributions) on the amount that can be contributed each year to any employee’s 401(k). This will increase from $61,000 to $66,000 for young workers and from $67,500 to $73,500 for those 50 and over, who benefit from this catch-up. Higher paid employees may find this number relevant, since some plans allow workers to supplement their own contributions to reach the limit. Top-ups must be made with after-tax dollars and do not go into a Roth.

It works like this: pre-tax contributions reduce your current tax bill and increase deferred tax, but all your retirement withdrawals are taxable (with some exceptions for money transferred directly to charity). Roth contributions are made after tax, and all of their earnings (along with initial contributions) are tax-exempt upon retirement. Earnings on after-tax contributions are simply tax-deferred and only the initial contributions are tax exempt.

IRA Contributions and Income Limits

Although the amount you can contribute to an IRA has increased from $6,000 to $6,500, that’s not the only number that’s been adjusted for inflation. You cannot make a tax-deductible contribution to an IRA unless you don’t have a workplace retirement plan or your income is below certain limits. For 2023, the deduction will be phased out for single taxpayers earning between $73,000 and $83,000 (from $68,000 to $78,000) and for married couples earning jointly between $116,000 and $136,000 (from $109,000). $000 and $129,000). If your spouse is covered by a company plan and you are not, your deduction for an IRA will increase from $218,000 to $228,000 in 2023, rising from $204,000 to $214,000 in 2022.

At the same time, the income limits for contributing to a Roth IRA, which are higher than those of the pre-tax IRA, are also increasing sharply. (Important note: Both the pre-tax IRA and the Roth IRA are subject to the same $6,500/$7,500 contribution limit. Roth IRAs are generally considered a desirable account to fund because they are so flexible: you You can still withdraw your initial contributions to a Roth IRA without facing the kind of tax penalties that can hit pre-retirement withdrawals from other accounts.In fact, Roth IRAs can even function as an emergency account for young people. savers.)

The income phase-out for contributions to a Roth IRA for singles and heads of households will be $138,000 to $153,000 in 2023 (from $129,000 to $144,000). For married couples filing jointly, the elimination range will be $218,000 to $228,000, up from $204,000 to $214,000 this year.

SEP IRAs and Solo 401(k)s

These are plans designed for the self-employed and small business owners. The maximum that can be saved in a SEP IRA will increase to $66,000 from $61,000 in 2022. This is considered an employer contribution and is based on total income. A self-employed person can effectively contribute up to 20% of their earnings up to $330,000, up from $305,000 in 2022.

The limit on total contributions to a Single 401(k)– a 401(k) for the self-employed – goes from $61,000 to $66,000 for young people and from $67,500 to $73,500 for those 50 and older. This is the same as the aggregate limit for regular 401(k). Part of it is the employee contribution, which has the same contribution limits as any other 401(k) – $22,500 in 2023 for younger workers and $30,000 for those 50 or older. The other part is the employer’s contribution and is based on income. One of the benefits of a Solo 401(k) is that the employee contribution portion allows self-employed individuals to save significant amounts at lower income levels than a SEP IRA. Another benefit is that people age 50 and older can make an additional catch-up contribution to a Solo 401(k), but not to a SEP IRA.

Savings loan

It is a tax credit designed to encourage low- and middle-income workers to save for retirement by matching (at a rate of 10% to 50%) part of what they contribute to an IRA or workplace plan. The credit gradually decreases as the taxpayer’s income increases. In 2023, the credit will be phased out to $73,000 for married couples filing joint tax returns (from $68,000); $36,500 for singles and couples filing separately (down from $34,000 previously); and $54,750 for heads of households (previously $51,000).

Defined benefit plans

The amount that can be placed in a plan for a worker is affected by a congressionally set (and inflation-adjusted) limit on the portion of that worker’s salary that can be taken into account when calculating their future benefits. This maximum salary in 2023 will be $265,000, compared to $245,000 previously. The use of defined benefit plans has declined in larger companies, but older small business owners are increasingly using defined benefit plans tailored to their needs. collect huge amounts on a pre-tax basis.

QLAC

The dollar limit on the amount of your IRA or 401(k) you can invest in a qualified longevity annuity contract will increase in 2023 from $145,000 to $155,000. A QLAC pays you money in the future and is considered a way to avoid outliving your money or to meet long-term care expenses later in life. The $155,000 amount is a lifetime limit, not an annual limit.

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