In 2023, Americans may save hundreds of dollars more in tax-favored retirement plans.
Inflation adjustments released by the Internal Revenue Service on Friday will allow millions of Americans to save more in retirement accounts in 2023.
According to the benefits provider Milliman, the employee contribution maximum for 401(k) and comparable workplace plans will rise $2,000 to $22,500 in 2023, the greatest cash and percentage increase ever. According to the Investment Company Institute, around 60 million American workers have 401(k) plans.
In 2023, the contribution limit for individual retirement accounts will increase from $6,000 to $6,500. The restriction has been the same since 2019.
In 2023, the catch-up contribution limit for those 50 or older will increase by $1,000 to $7,500. The non-inflation-adjustable $1,000 catch-up contribution cap for individual retirement accounts stays unchanged.
The 2023 contribution ceiling for employees of corporations that permit special after-tax contributions and self-employed individuals with individual 401(k) or SEP retirement plans is $66,000, up $5,000 from this year. Employee and employer contributions are included. Plus catch-up payments, senior investors can give up to $73,500 to these plans in 2023.
The retirement announcement followed Tuesday’s disclosure of modifications to income tax rates and hundreds of other adjustments, including the estate and gift tax exclusion, made annually in accordance with congressionally-established formulae.
The increased restrictions provide substantial savings opportunities.
You may not feel the sting now, but you will enjoy the benefits in retirement, says Maria Bruno, head of U.S. Wealth Planning Research at Vanguard, which manages retirement plans for almost five million members.
14% of members in Vanguard’s retirement savings programs saved the maximum amount of $19,500 ($26,000 for those 50 or older) in 2021. Six out of ten people earning more than $150,000 made catch-up payments.
According to the Investment Company Institute, 37 percent of families with regular IRAs or Roth IRAs in mid-year 2021 made contributions in the tax year 2020. The median amount contributed was $5,000.
The inflation adjustments also apply to the income criteria used to determine whether taxpayers may deduct IRA contributions on their tax returns and whether they can contribute to a Roth IRA.
In 2023, the deduction for conventional IRA contributions will be phased away for taxpayers with modified adjusted gross incomes between $73,000 and $83,000 whose modified adjusted gross incomes in 2022 were between $68,000 and $78,000. In 2023, for married couples filing jointly when the spouse making the IRA contribution is covered by an employer retirement plan, the deduction is phased out for taxpayers with income between $116,000 and $136,000, up from between $109,000 and $122,000 in 2018.
In 2023, if a non-covered saver is married to a covered spouse, the deduction for traditional IRA contributions is phased out if the couple’s income is between $218,000 and $228,000, up from between $204,000 and $228,000 in 2018.
For Roth IRAs, contributions are made with after-tax dollars, contribution eligibility is dependent on income. Once you reach a particular range of income, the amount you may contribute to a Roth IRA is lowered until you hit a threshold at which contributions are no longer permitted.
In 2023, the income threshold for Roth IRA eligibility for married couples filing jointly will be between $218,000 and $228,000, up from between $204,000 and $218,000 in 2018. In 2023, the salary range for singles and household heads will be between $138,000 and $153,000, up from between $129,000 and $144,000 in 2019.
Even if you earn too much to qualify for a tax deduction, you can still contribute to an IRA.
Roth IRAs are not available to those with high incomes, but nondeductible IRAs can be converted into Roth IRAs through a backdoor Roth IRA.
The modifications are intended to keep your retirement funds in step with inflation. Ms. Bruno explains, If investors can raise their donations, that money has the potential to grow exponentially over time.