The Internal Revenue Service announced today that young workers will be allowed to contribute up to $22,500 pretax to a 401(k) or similar retirement savings plan in 2023, a $2,000 jump from the current $20,500 limit. Those 50 or older will be permitted to sock away up to $30,000, a $3,000 boost, which includes a $7,500 “catch-up” contribution, up from a $6,500 catch-up in 2022. That means employees who are already contributing the maximum and are able to save more will in effect be able to give themselves a tax cut.
At the same time, the IRS said, the limit for contributions to a pre-tax or Roth IRA will rise next year to $6,500, up from the $6,000 level where it has been stalled for four years. Those 50 and older can make an additional $1,000 catch-up contribution to an IRA—a number that is not subject to inflation adjustments.
Meanwhile, the maximum contribution an employee can make to a Simple IRA Plan—a retirement plan designed for small businesses—will rise to $15,500 in 2023, up from $14,000.
The contribution limit increases were widely anticipated since they are based on the inflation rate—now running at a 40-year high. According to benefits consultant Mercer, the limit increases are all the largest ever. (The last time inflation was this high, automatic adjustments weren’t a part of the tax code.)
Last week, the IRS released a slew of other inflation adjustments, including higher standard deductions and tax brackets and increases in the amount of wealth that can be transferred free of gift or estate tax. The Social Security Administration also announced an 8.7% cost of living adjustment for 2023—an automatic benefits boost increase for 70 million Americans.
The full set of IRS adjustments to retirement plans are available here, in Notice 2022-55.
Here’s more of what you need to know about the retirement adjustments for 2023.
401(k) Plans
The new $22,500 and $30,000 limits apply to employee contributions that are made either pre-tax or to a Roth account in a 401(k) plan, or to similar plans maintained by non-profit and government employers—403(b) plans, most 457 plans and the federal government’s Thrift Savings Plan for workers.
There’s also an overall limit (including employer contributions) on how much can go into any employee’s 401(k) each year. That will be jumping from $61,000 to $66,000 for younger workers and from $67,500 to $73,500 for those 50 plus, who get that catch-up boost. The highest paid employees may find that number relevant, since some plans permit workers to top up their own contributions to reach the limit. Top-up contributions must be made with after tax dollars and don’t go into a Roth.
It works like this: Pre-tax contributions reduce your current tax bill and grow tax deferred, but all your withdrawals in retirement are taxable (with certain exceptions for money transferred directly to charity). Roth contributions are made after tax and all earnings on them (as well as the original contributions) are tax free when taken out in retirement. Earnings on after-tax contributions are merely tax deferred and only the original contributions come out tax free.
IRA Contributions And Income Limits
While the amount you can contribute to an IRA is rising from $6,000 to $6,500, that’s not the only number that has been adjusted for inflation. You can’t make a tax deductible contribution to an IRA unless you either have no workplace retirement plan or your income is below certain limits. For 2023, the deduction will phase out for single taxpayers earning between $73,000 and $83,000 (up from $68,000 to $78,000) and for married couples filing jointly earning $116,000 to $136,000 (up from between $109,000 and $129,000). If your spouse is covered by a workplace plan and you’re not, your deduction for an IRA phases out between $218,000 and $228,000 in 2023, up from $204,000 to $214,000 in 2022.
At the same time, the income limits to make a contribution to a Roth IRA, which are higher than those for the pre-tax IRA, are also rising sharply. (Important note: the pre-tax and Roth IRA are both subject to the same $6,500/$7,500 contribution limit. Roth IRAs are generally considered a desirable account to fund because they are so flexible—you can always take out your original contributions to a Roth IRA without facing the sort of tax penalties that can hit pre-retirement withdrawals from other accounts. In fact, Roth IRAs can even function as an emergency account for young savers.)
The income phase-out for contributions to a Roth IRA for singles and heads of household will be $138,000 to $153,000 in 2023 (up from $129,000 to $144,000). For married couples filing jointly, the phase-out range will be $218,000 to $228,000, up from $204,000 to $214,000 this year.
SEP IRAs and Solo 401(k)s
These are plans designed for the self-employed and small business owners. The maximum that can be saved in a SEP IRA will go to $66,000, up from $61,000 in 2022. That’s considered an employer contribution and is based on total earnings. A self-employed person can effectively contribute up to 20% of earnings of up to $330,000, up from $305,000 in 2022.
The limit for total contributions to a Solo 401(k)—a 401(k) for self-employed folks—is rising from $61,000 to $66,000 for younger folks and from $67,500 to $73,500 for those 50 and older. That’s the same as the overall limit for regular 401(k)s. One part is the employee contribution, which has the same contribution limits as any other 401(k)—$22,500 in 2023 for younger workers and $30,000 for those 50 or older. The other part is the employer contribution and is based on earnings. One advantage of a Solo 401(k) is that the employee contribution part allows the self-employed to save large amounts at lower earnings levels than with a SEP IRA. Another advantage is that those 50 and older can make an additional catch-up contribution to a Solo 401(k), but not to a SEP IRA.
Saver’s Credit
This is a tax credit designed to encourage low and moderate income workers to save for retirement by matching (at a rate of 10% to 50%) some of what they contribute to an IRA or workplace plan. The credit phases down and out as a taxpayer’s income rises. In 2023, the credit will phase out at $73,000 for married couples filing joint tax returns (up from $68,000); $36,500 for singles and couples filing separately (up from $34,000); and $54,750 for heads of household (up from $51,000).
Defined Benefit Plans
The amount that can be put into a plan for any one worker is affected by a Congressionally set (and inflation adjusted) limit to how much of that worker’s salary can be considered for calculating his future benefit. That maximum salary in 2023 will be $265,000, up from $245,000. The use of defined benefit plans has declined at big companies, but older small business owners have increasingly been using custom designed defined benefit plans to sock away huge amounts on a pre-tax basis.
QLACs
The dollar limit on the amount of your IRA or 401(k) you can invest in a qualified longevity annuity contract will rise in 2023 to $155,000 from $145,000. A QLAC pays you money some time in the future and is considered a way to avoid outliving your money or to provide for long term care expenses late in life. The $155,000 is a lifetime limit, not an annual limit.