Every year, the IRS publishes whether or not there will be any new updates to their retirement plan contribution limits and income requirements. With inflation stubbornly hovering over 8 percent for most of 2022, many people guessed that contribution increases were on the horizon – and they were right!
In this post, we’ll review those changes, what it means for your money, and even explore a strategy for choosing which ones to contribute to first.
IRS Contribution Limit Changes for 2023
Starting in 2023, participants of employer-sponsored retirement plans such as the 401k, 403b, most 457 plans, and the federal government’s Thrift Saving Plan can start saving as much as $22,500 into their accounts. That’s up from $20,500 last year and is roughly a 10 percent increase.
People aged 50 and older are allowed to make an additional catch-up contribution of $7,500 for the year (up from $6,500 last year). This means that anyone near retirement can stash a combined total of $30,000.
Keep in mind that these limits are per employee. So, if you and your spouse both are working and each participates in one of these plans, then you can essentially save double or $45,000 in total. Couples aged 50 and older can save a collective total of up to $60,000.
IRA Contribution Changes
Employer-sponsored plans aren’t the only retirement accounts to have their contribution limits increased. Individuals who also utilize either a traditional or Roth IRA can save an extra $500 for a total of up to $6,500. Anyone age 50 and older can make an additional catch-up contribution of $1,000 (unchanged from last year).
Similar to 401k plans, these contribution limits are per individual. So couples can essentially save double this amount for a combined total of $13,000.
However, unlike 401k plans, your ability to use an IRA will be limited by how much money you make. Therefore, it’s important to know the latest IRS income limits so that you can be sure if you’re allowed to participate.
The IRS regularly updates these income limits for inflation. As of 2023, the following are the new federal income limits:
- Traditional IRAs – Single filers can make fully tax-deductible contributions as long as their income is below the phase-out range of $73,000 and $83,000 (up from $68,000 and $78,000 in 2022). If you earn more than this, you’re still allowed to contribute to a traditional IRA. However, those contributions will not be tax deductible.
- Roth IRAs – Single filers can make contributions as long as their income is below the phase-out range of $138,000 and $153,000 (up from $129,000 and $144,000 in 2022).
For a full list of the latest income requirements, please check the IRS’s website.
If you’re unsure about whether or not you qualify, a good place to look is your adjusted gross income (AGI) on last year’s tax return. Though eligibility is always based on the current year’s income level, using last year’s figure as a reference will help you to know if you’re in the ballpark.
Which Retirement Plans Should I Contribute to First?
With each of these retirement plan contribution limit increases comes the chance to get more tax-advantaged savings and increase your nest egg. However, your household budget is finite – there’s only so much money you can save before you have to start paying your bills and other expenses. So you may have to pick and choose which plans you’d like to utilize.
Thankfully, many people within the personal finance community have given this problem some thought, and collectively they have these simple recommendations.
1) Get Your Full Employer Match
When you contribute to your 401k plan, most employers will also make a contribution on your behalf. These are called “employer matching contributions” and they’re used to help motivate their employees to save more for retirement.
As the name implies, these contributions are usually a dollar-for-dollar match. However, sometimes the amount can be structured to decrease to 50 or 25 cents per dollar after a certain threshold. These contributions are also eventually capped at some pre-determined amount by the employer.
Most financial gurus agree that your 401k is one of the best places to start because of getting this free money. If you’re getting dollar-for-dollar, it’s basically the equivalent of getting an automatic 100 percent return. If that wasn’t reason enough, those matching contributions are also tax-deferred!
2) Max Out Your Roth IRA
After getting the full employer match from your 401k plan, the next account to fund is your Roth IRA. For most middle-class Americans, saving your money into a Roth IRA will have a lot of incredible future benefits:
- All contributions will grow tax-free
- All withdrawals made after age 59-1/2 will be available tax and penalty-free. That means more money to enjoy in retirement and less going to the IRS.
- Unlike traditional 401ks and IRAs, participants will never be required to take RMDs (requirement minimum distributions) after turning 72 years old.
There is also an advantage to starting a Roth-style account early on in life. As you get older, many financial advisors recommend considering moving a portion of your traditional 401k and IRA savings into Roth-style accounts so that these funds will also be tax-free in retirement. By having the account set up now, you’ll have a much easier time exercising this option if you decide to use it later on.
3) Max Out the Remainder of Your 401k
Next, it’s time to pivot back to your 401k plan. Continue to contribute as much as you can until you’ve reached the maximum.
Even though at this point there will be no additional employer match to capture, you’re still reaping the benefits of tax avoidance. Every dollar that you contribute to the 401k plan gets subtracted from your taxable income for the year, meaning you’ll have a lower tax bill. At the same time, those contributions will grow tax-deferred for decades until someday in the future when you’re ready to retire.
If you’d like to contribute more to your 401k, IRA, or any other eligible retirement plan, then the best way to do this will be to take a hard look at your budget. Use an app like Buxfer to track your purchases for a month or two. Buxfer automatically connects with thousands of banks and credit cards, and it can consolidate these transactions into one helpful dashboard. This will help you to more easily spot where you might be spending unnecessarily, how much money can be saved, and how much more you’ll have to contribute to your retirement plans in 2023.
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