It is not too often that we see positive changes made to our nation’s tax code but they do occasionally happen! A good recent example of this is the so-called “SECURE Act 2.0” which is set to go into effect as early as year-end if it makes it to the President’s desk (see our blog post on this topic here). However, while that change is a large, irregular one, there are annual changes that we have come accustomed to seeing from the IRS. These changes are directed at how much you are allowed to contribute to your retirement accounts in the upcoming tax year.
Individual Retirement Accounts
Roth or Traditional Individual Retirement Accounts (IRA) are a primary source of retirement savings for individuals outside of their employer sponsored retirement plans (401(k), 403(b), etc.). These accounts offer distinct tax advantages from other types of investment accounts and are important for an independent retirement. However, there are limits to how much you can contribute to an IRA annually imposed by the IRS. For the tax year 2023, the IRS is raising the maximum contribution limit to $6,500 - $500 more than 2022[i]. While this could be a welcome change to those looking to make the most of their retirement contributions, it is worth noting that not everyone will be able to take advantage of this. The ability to contribute to a Roth IRA is limited by your income (unless you utilize this strategy) as is the ability to make deductible contributions to a Traditional IRA. However, those limits have also gone up which we will discuss later in the post.
For those who are eligible and already making maximum contributions to their IRA, now would be a good time to evaluate whether or not your budget allows for an additional $500 in contributions next year. If so, make sure that your annual or monthly contributions reflect the new amount!
Employer Plans and Catch Ups
The most highly utilized retirement accounts in the nation are employer sponsored plans such as 401(k), 403(b), and 457 plans. These types of plans offer an easy and convenient way to invest money that is taken directly from your paycheck pre-tax. These plans typically offer some sort of employer match or profit sharing as well. The contribution limit on these types of accounts has also increased by $2,000/year to $22,500. Additionally, employees over 50 can also make “catch-up” contributions in the amount of $7,500 for 2023 (an increase of $1,000 from 2022). This makes it possible for those over 50 to contribute as much as $30,000 to their retirement account next year. This could be very beneficial for those who started investing later in life and are working to catch up in time for retirement! In addition, participants in SIMPLE IRA’s, another type of employer plan, are now able to contribute $15,500 to their accounts for 2023 (a $1,000 boost).
For those of any age who have access to this type of plan, now would be a good time to take a look at how much you are contributing to your account annually. You will be able to find this number on your tax form W2 early next year but you should be able to see it just as easily on your most recent paystub. Keep in mind with both of these first two points that I am not broadly advocating for every investor to make maximum contributions to their retirement accounts. I simply want you to be aware of all the opportunities you have to invest. For specific advice and planning, I would suggest that you speak with a financial advisor (I happen to know a few 😊).
As I mentioned earlier, your ability to contribute and deduct contributions in a Roth and Traditional IRA respectively, is limited by your income as well as your participation in an employer sponsored plan. In the case of a Roth IRA, couples who file jointly will see their ability to contribute phased out to zero from $$218,000 - $228,000 in annual income. This limit has been increased from 2022 when the phase-out range was $204,000 - $214,000[i].
Traditional IRAs add an additional level of consideration: whether or not the account owner or their spouse contributes to an employer sponsored plan. If the spouse making the IRA contribution is covered by a workplace retirement plan, their ability to contribute is phased out between $$116,000 and $136,000 in annual income (up from $109,000 - $129,000). For contributors who are not contributing to an employer plan but have a spouse who is, their ability to contribute to an IRA phases out between $218,000 and $228,000 (up from $204,000 - $214,000).
While things in our world continue to change at a rapid rate, the IRS is no exception. Which is why we remain dedicated to informing you of changes that will potentially affect your financial plan! That said, we would love to share news and educational information with more people. If you like our blog and find it beneficial, please consider clicking the button below to find our “Subscribe” page. From there, copy the link and forward it to someone who you think would benefit! Thanks again for taking the time to read our blog!
Today’s song of the week is another 90s country classic (sensing a theme here?). Enjoy!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax. A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.