Tax changes increase retirement contribution limits for 401(k)s and IRAs in 2023

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.

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