In light of the high inflation of 2022, the Internal Revenue Service (IRS) has increased the amounts you can contribute to retirement savings in 2023.
The amount you can contribute to a 401(k) has increased to $22,500, an increase of $2,000. The limit for IRA contributions is $6,500 up to $500.
Increase in retirement savings
If you have a retirement savings plan, whether it’s a 401(k), 403(b) most 457 plans, or the Thrift Savings Plan (TSP), you can now save $22,500 $ during the calendar year. That’s up from $20,500 for 2022.
401(k) or similar plans are often considered an effective way to save for retirement because your money can grow tax-free. Matching employers can also help. Often, your employer will encourage you to save by matching all or part of your contributions up to a certain level. Additionally, since contributions to a 401(k) plan generally do not incur income tax, contributing to a 401(k) plan can also reduce your current tax bill.
Boost for IRAs
There is effectively a double boost for IRA savings in 2023. The amount you can save in an IRA plan increases from $6,000 to $6,500. Additionally, as income tax thresholds have increased, so have income limits for IRA contributions.
Similar to a 401(k), an IRA can be another tax-free way to save for retirement. If you use a traditional IRA, retirement withdrawals may be taxed, but contributions may be tax-deductible when you contribute. If you use a Roth IRA, you pay tax on the money that comes in, but retirement withdrawals should then be tax-free.
Phasing out traditional IRA contributions
For single taxpayers, the traditional IRA contribution phase starts at $73,000 and for married people filing jointly, the phase-out now starts at $116,000 if you have a workplace pension plan and $218,000 if you don’t have one.
Phasing out the Roth IRA contribution
For a Roth IRA, the 2023 single taxpayer phaseouts start at $138,000 of income. For married people filing jointly, it’s $218,000.
High inflation therefore has an advantage in that you may now be able to save more tax-free for your retirement in 2023.