The Internal Revenue Service (IRS) announced significant increases to retirement plan limits for tax year 2023. These highly anticipated cost-of-living adjustments, which were published on Friday, October 21, 2022 are a small silver lining to record high inflation.
In 2023, workers can contribute $22,500 pre-tax to a 401(k) or other similar retirement savings plan – a $2,000 increase from 2022. Workers aged 50 or older can also contribute $7,500 in catch up contributions in 2023, a $1,000 increase from 2022.
What does this mean for you?
If you already maximize your annual contributions and have the ability to save more, you may be able to lower your taxable income by $2,000 – $3,000 in 2023 depending on your age.
Only pre-tax contributions will reduce your current tax burden; however, the increased limits apply to Roth contributions in these plans as well.
(Limits for other types of retirement plans will vary. See IRS Notice 2022-55 for details.)
What if your retirement plan is not a 401(k)?
The increases are not limited to employer sponsored retirement plans like 401(k)s. For those eligible to make contributions to a pre-tax or Roth IRA, the limits will increase to $6,500 – a $500 increase. The age 50 catch-up contribution in these accounts remains unchanged at $1,000.
Is there a compensation limit with these changes?
The compensation limit for 401(k) or other similar retirement savings plans will increase from $305,000 to $330,000. If your income is above this level and your plan matches on a percentage of pay, you may also see a greater dollar amount in employer matching contributions for 2023.
Make sure to adjust your payroll deduction in January 2023 to ensure that you are taking advantage of the increased limit.
What other changes are included?
Increases for several key retirement related items including the Saver’s Credit and Health Savings Accounts (HSA) take effect in 2023. See below tables for a summary.
*Amount of the credit: The amount of the credit is 50%, 20%, or 10% of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on your adjusted gross income reported on your Form 1040. The chart above can be used to calculate the credit.
Sources:
https://www.mercer.com/our-thinking/law-and-policy-group/mercer-projects-record-increases-for-2023-retirement-plan-limits.html
https://www.irs.gov/pub/irs-drop/n-22-55.pdf
Disclosures:
FOR FULL DETAILS ON THE 2023 RETIREMENT PLAN LIMITS, VISIT THE IRS WEBSITE (IRS.GOV). THESE MATERIALS ARE OFFERED FOR GENERAL INFORMATIONAL PURPOSES ONLY AND NOT AS TAX OR LEGAL ADVICE. INFORMATION IS BASED ON SOURCES BELIEVED TO BE RELIABLE BUT THE ACCURACY OF SUCH INFORMATION HAS NOT BEEN INDEPENDENTLY VERIFIED.
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