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By Andrew Keshner
Workers aged 50 and over will notably benefit from the new 401(k) contribution limits for 2023.
Days after the Internal Revenue Service announced major inflation-related increases in tax brackets and standard deduction payments for 2023, the tax agency is announcing sweeping increases in the amounts of money savers can deposit in retirement accounts.
People can contribute up to $22,500 into 401(k) accounts and $6,500 into IRAs in 2023, the IRS announced Friday.
For 401(k)s, this is an increase of nearly 10% over the $20,500 contribution limit in 2022. For IRAs, this is an increase of more than 8% over the 2022 $6,000 limit.
As additional context, the tax year 2023 income tax brackets indexed to inflation and the standard deduction have operated at around 7%.
When the IRS increased 401(k) contribution limits last year, there was an increase of about 5%.
“Given the inflation we’ve been experiencing recently, the early announcement of this increase is encouraging,” said Rita Assaf, vice president of retirement products at Fidelity Investments, after the IRS released the caps. contribution for 2023.
According to research by Fidelity, seven out of 10 people are “very concerned” about the impact of cost inflation on their retirement readiness, Assaf noted. “Every dollar counts, and this increase will give Americans the ability to set aside a little more to help fund their retirement goals,” she said.
Older workers can save even more
The 2023 contribution limits that apply to 401(k) plans — plus 403(b) plans, most 457 plans, and the federal government’s savings plan — are even higher for low-income workers. 50 years and over.
Catch-up contribution limits are increased from $6,500 to $7,500, the IRS said. Combine catch-up contributions with regular contribution limits, and workers 50 and older can save $30,000 for retirement in these accounts in 2023, the agency said.
Income phase-outs increase with respect to possible deductions, credits and contributions
Tax rules may allow people to deduct contributions to traditional IRAs as long as they meet certain conditions, related to issues such as workplace pension plan coverage and annual income. Above the phase-out ranges, the deductions do not apply if a person or their spouse has a work-based retirement plan, the IRS noted.
For 2023, a single taxpayer covered by a workplace pension plan has a phase-out range between $73,000 and $83,000. This represents an increase from a range between $68,000 and $78,000 in 2022.
For a married couple filing jointly “if the spouse contributing to the IRA is covered by a workplace retirement plan, the phase-out range is increased to between $116,000 and $136,000,” the report said. ‘IRS.
If an IRA saver doesn’t have a work plan but their spouse is covered, “the phase-out range is raised to between $218,000 and $228,000,” the agency noted.
There are also changes coming for the Roth IRA, which people fund with after-tax money and can then draw down tax-free later.
Also read: Here’s when to choose a Roth IRA over a traditional account
Roth IRA contribution limits also jump to $6,500. Retirement savers who put money into their 401(k) also can’t put pre-tax money into a traditional IRA, but they can contribute to a Roth account.
Nonetheless, eligibility to contribute to Roth IRA accounts is income-tested, subject to phasing-out ranges.
In 2023, the income phase-out range on Roth IRA contributions climbs between $138,000 and $153,000 for individuals and those filing as head of household. (That’s up from a range between $129,000 and $144,000, the IRS noted.)
With a married couple filing jointly, next year’s elimination range increases to $218,000-$228,000. That’s a step up from this year’s range of $204,000 to $214,000.
The resource ceiling surrounding savings credit, which is aimed at low- and low-income households, has also been raised. The credit allows taxpayers to claim 10%, 20%, or half of contributions to qualifying retirement plans, including a 401(k) or IRA. Credit income limits are increasing, the IRS said.
The 2023 income limit will be $73,000 for married couples filing jointly, $54,750 for heads of families and $36,500 for individuals and married individuals filing separately, according to the IRS.
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-Andrew Keshner
(END) Dow Jones Newswire
10-23-22 1256ET
Copyright (c) 2022 Dow Jones & Company, Inc.
