Retirement Contribution Limits for 2023Submitted by Korhorn Financial Group, Inc. on October 27th, 2022
By Mike Bernard, CFP®, ChFC, AIF®, EA
2023 retirement plan contribution limits were just announced and it's a big change. Should it change your financial plan?
Every single year, the IRS announces what your contribution limits are for the 401(k), 403(b), IRA, Roth IRA, and other retirement accounts for the next year. Oftentimes it doesn't increase that much, but with white-hot inflation comes meaningful increases in what you're able to contribute to retirement plans next year, with the 401(k) having a record-high increase.
Take a look at this chart for the 401(k) and 403(b), your contribution limits are increasing by two thousand dollars.
In 2022, the contribution limit was up to a hundred percent of what you earned at that job but not to exceed $20,500. In 2023 it is increasing by two thousand dollars, up to $22,500. This is the largest increase for the 401(k) ever recorded. Call me old school, but I remember when the limit was $15k-16k.
Over the past few years, the catch-up contribution for defined contribution plans has not received an increase, however, this limit is also getting a boost as well, going from $6,500 to $7,500. So, if you are age 50 or will be turning age 50 in 2023, you can contribute $30,000 to your 401(k) or 403(b).
How should this impact your financial plan? First, if you've got the means to do so, you're managing your cash flow, and you're turning age 50 next year, make sure you increase your contribution percentage so that you're capturing this new increased limit.
Second, if you, as part of your financial plan and overall tax shelter strategy, are wanting to contribute the maximum every year, this might be a big enough increase that you will need to update your contribution percentage. If in 2022 you are contributing 12, 15, or 16% and achieving the maximum limit for the full year, in 2023 you’re not going to automatically maximize your contribution. You’ll need to do the math, update your numbers, and if needed, increase your contribution for next year so you reach the $22,500 limit if you’re under 50 or the $30,000 limit if you’re age 50 or older.
If you have a SIMPLE IRA plan — and many employers are shifting from SIMPLE IRAs to 401(k)s because of the Multiemployer Plan and all the benefits it has to offer; if you own a small business and have a SIMPLE IRA reach out to our Retirement Plans Department so we can help compare and contrast whether the SIMPLE IRA still makes sense — those are getting a boost in contribution limits as well. Going from $14,000 up to $15,000, and your catch-up contribution going from $3,000 to $3,500.
As for the IRA and the Roth IRA, they share the same contribution limit. Therefore, while you can contribute to both an IRA and a Roth, the total contributions you make to all traditional IRA and Roth IRA accounts cannot exceed the annual limit. Thankfully, this limit is also increasing in 2023, for the first time in a long time. The limit is rising from $6,000 to $6,500 with a catch-up contribution of $1,000 for individuals aged 50 and over. Keep in mind that you’ve got to have earned income to cover that limit. If you have enough earned income but your spouse doesn’t, you can make a spousal contribution to their IRA as well.
Possibly a more substantial change for IRAs and Roth IRAs is the expansion of the phase-out range. So, while your contribution limit did not increase much for 2023, the number of people that are now eligible to contribute has increased significantly.
For traditional IRA contributors with a retirement plan available to them, your phase-out range is now $73,000 to $83,000 for individuals and $116,000 to $136,000 for married couples filing jointly. If you don’t have a retirement plan available to you, then it does not matter how much you earn, you can deduct your contributions.
For Roth IRA single filers, your phase-out range is from $138,000 to $153,000, an increase of almost $10,000 from 2022. For married filing jointly, the phase-out range is $218,000 to $228,000. If your Adjusted Gross Income (AGI) is over $228,000 and you're trying to contribute to a Roth, you won't be able to do so even if you're married.
And then lastly, my favorite tax credit. And yes, I'm a geek, so I can have a favorite tax credit. It's the Retirement Savers Credit and this one is my favorite because it's a dollar-for-dollar benefit to you just for contributing to your retirement and not something you need to pay back.
Depending on your AGI, the credit is either 50%, 20%, or 10% of the first $2,000 you contribute to a retirement account. Income thresholds for the credit have expanded for 2023; married filing jointly can have income up to $73,000, heads of household can have income up to $54,750, and single filers must be under $36,500.
Normally these income ranges are right at the beginning of your career, maybe at the end of your career, in-between jobs, or in some other situation where your income would be below these thresholds. Make sure you're doing financial planning so that you can capture these tax credits that most people aren't eligible for, and you can get the tax benefit.
How do these new increased contribution limits impact your financial plan? I would ask two questions.
- One, does this impact your tax shelter strategy? With these changed income thresholds and phase-out thresholds, could you and should you contribute to other retirement accounts that maybe you weren't eligible for in the past? For example, maybe you should contribute to a Roth IRA, even though in the past you weren't eligible.
- Two, do you find yourself needing to play catch-up on retirement savings? If so, these expanded limits should certainly help.
Work with your Certified Financial Planner™ and see how this influences your overall strategy and financial plan for retirement. If you don't have a CFP® on your team that can help you with that, contact one on our team. Contact us at 574-247-5898 or email firstname.lastname@example.org.