Financial Advisor in Raleigh NC: IRS 2023 Contribution Limits

Retirement savers will be able to stash away significantly more money in their 401(k)s and IRAs next year. The IRS said it is boosting the 2023 contribution limits for 401(k)s by a record $2,000 due to the high pace of inflation, which will allow workers to sock away more money in 2023. 

New 2023 401(K) limit: $22,500

Individuals will be able to save up to $22,500 in their 401(k)s next year, an increase of 9.8% from the current year's limit of $20,500, the agency said in a statement. The new limit also applies to other types of defined contribution plans, including 403(b), most 457 plans and the federal government's Thrift Savings Plan.

It's the biggest inflation adjustment since 401(k) plans began indexing to inflation in 2007. Typically, the IRS has increased the contribution limit by either $500 a year or kept it at the same level since the plans began instituting cost-of-living increases 15 years ago.

The IRS makes inflation adjustments annually to everything from tax brackets to the Earned Income Tax Credit, but this year's hot inflation means that many of the changes are more significant than in a typical year. Americans are struggling with the highest inflation in 40 years, which is eating into their purchasing power as average wage gains lag the sharp rise in prices.

The IRS announced higher tax brackets for 2023, which could trim tax bills for many workers next year. Higher contribution limits for retirement plans could also help millions of Americans lower their tax bills, since socking away money for retirement is often made on a tax-deductible basis — in other words, every dollar that is contributed to a 401(k) can be deducted from taxable income.

New 2023 IRA limit: $6,500

The IRS said the contribution limit for IRAs will increase to $6,500 next year, a boost of 8.3% from the 2022 limit of $6,000. 

However, the catch-up contribution for people over the age of 50 will remain at $1,000, because that rule isn't subject to an annual adjustment for inflation, the agency said. 

The IRS said it is also boosting the "phase-out" range for whether an individual can deduct their contributions to a traditional IRA. If a taxpayer or their spouse is covered by a workplace retirement plan — like a 401(k) — and earns above a certain amount, they may be limited or prohibited from deducting their IRA contributions from their taxable income.

The IRS said single taxpayers who have a workplace retirement plan will see the phase-out range increased to between $73,000 to $83,000 next year, up from between $68,000 to $78,000 in 2022. That means single taxpayers with a 401(k) or similar type of plan won't be able to deduct an IRA contribution from their taxable income if they earn over $83,000 next year. 

The Bottom Line

If you have the ability to afford an increase in your 401(k) or any retirement contribution, it's wise to make the commitment. Even if you aren’t maxing out your efforts, any extra can mean huge returns in the future. Those who aren’t making contributions or aren’t increasing their contributions to combat the cost-of-living increases will likely feel greater repercussions in retirement or have to prolong retirement to save more.

Consult with your financial advisor, tax advisor or financial planner to make sure you are making the most out of the new IRS contribution limits.

Sources:

https://smartasset.com/retirement/401k-contribution-limits-2023

https://padmin.com/participants/retirement-accounts/

https://www.bankrate.com/retirement/401k-contributions/

https://www.irs.gov/newsroom/401k-limit-increases-to-22500-for-2023-ira-limit-ris

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