Millions of Americans will be able to save more in retirement accounts next year—because of the inflation adjustments made Friday by the Internal Revenue Service.
Employees will see their 401(k) contribution limit jump $2,000 to $22,500 for 2023, the largest increase ever in terms of dollars and percentage, according to benefits provider Milliman. About 60 million American workers have 401(k) plans, according to the Investment Company Institute.
In 2023, taxpayers will be able to contribute an additional $6,500 to their individual retirement accounts. The current limit hasn’t changed since 2019.
For the first time since 1980, the catch-up contribution amount allowed if you are 50 or older will rise $1,000 to $7,500 for 2023. For IRAs, which aren’t subject to inflation adjustments, the catch-up contribution limit remains at $1,000.
For workers who contribute to their employer’s retirement plan, there is a $66,000 limit on total contributions for 2023. That includes employee and employer contributions. With catch-up contributions on top, older savers can contribute up to $73,500 in 2023 to these plans.
Tuesday’s announcement of adjustments to income tax brackets and dozens of other adjustments including the estate and gift tax exclusion came after Tuesday’s announcement that Congress set formulas for changes in income tax brackets each year.
The higher limits offer a big savings opportunity for people who are younger and have time to enjoy the money. “You may not feel the pinch now, and you’ll reap the rewards later in retirement,” says Maria Bruno, head of U.S.
Vanguard, the most successful mutual fund company in the world, has been offering retirement plans since 1976. In their 401(k) plans (which are offered in nearly every state), 14 percent of participants saved the maximum amount of $19,500 ($26,000 for those age 50 or older). Six in 10 participants with income of more than $150,000 made catch-up contributions.
In mid-2021, according to the Investment Company Institute (ICI), thirty-seven percent of households owning traditional IRAs or Roth IRAs made contributions in tax year 2020. The median contribution amount was $5,000. The inflation adjustments also apply to the income thresholds that determine whether taxpayers can deduct IRA contributions on their income tax returns, and whether taxpayers can contribute to a Roth IRA.
In 2023, the deduction for taxpayers making contributions to a traditional IRA is phased out if they are covered by a workplace retirement plan and have modified adjusted gross incomes between $73,000 and $83,000, up from between $68,000 and $78,000 this year.
For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the deduction is phased out for taxpayers with income between $116,000 to $136,000 for 2023
The deduction for traditional IRA contributions is phased out if the income of a couple who is not covered by a workplace retirement plan and is married to someone who is covered, is between $218,000 and $228,000 in 2023.
For Roth IRAs, you must have earned income to contribute to the account. The amount you can contribute is reduced as your income increases until it reaches a level where no contributions are permitted.
The income ranges for Roth IRA contributions and distributions will become much higher in 2023 than they are this year. In 2023, the income range where eligibility phases out for married couples filing jointly is between $218,000 and $228,000, up from between $204,000 and $214,000; for singles and heads of household, it is between $138,000 and $153,000 in 2023, up from between $129,000 and $144,000 this year.
If you earn too much to get a deduction for contributing to an IRA and have no other option, you can still contribute—it just won’t lower your tax bill. If you earn too much to open a Roth IRA but have already opened one, you can convert it into a nondeductible IRA and then convert it back into a Roth IRA.
The adjustments are designed to keep your retirement savings on pace with inflation. “If investors can increase their contributions, that money has the power to compound immensely over time,” says Ms. Bruno.