For 2023, the IRS brings significant increases to retirement plan contributions limits. This is great for savers out there, and I suppose one of the few bright spots from the high inflation numbers last year. I’ve said this before and I’ll say it again, we have a retirement crisis in this country so allowing people to save more in tax advantaged accounts will only help them in the long-term. This short summary will not address the provisions passed in SECURE ACT 2.0, as I will summarize important points in a later blog post.
Updated Contribution Limits
The contribution limits on all retirement accounts went up: IRA, Roth IRA, 401(k), 403(b) and SIMPLE IRA. Savers over 50 will still be eligible for a $1,000 catch-up allowance (Note – starting in 2024, this catch-up limit will automatically adjust for inflation). Health Savings Accounts (HSA) get a 5.5% increase from 2022. You are still able to make a $1,000 catch-up contribution to your HSA if you are age 55 or higher. I’ve said this before, and I’ll say it again – who knows why HSAs have to abide by a different age for catch-up contributions? I’m an advisor and have no clue. Oh well. We don’t write the rules – we just help you adhere to them.
In summary, you may contribute up to $6,500 to an IRA ($7,500 if you are age 50 or older). You may contribute $22,500 to an employer sponsored retirement account, i.e., 401(k), 403(b), or SAR-SEP ($30,000 if you are age 50 or older). To be eligible for the catch-up allowance of $7,500, you just need to turn 50 during this calendar year. If you are 49 today, yet turn 50 on December 31, you are eligible for the full catch-up provision for the entire year.
A breakdown of changes are as follows:
The defined contribution plan limits (401(k), 403(b)) increases from $61,000 to the lesser of $66,000 or 100% of compensation (this includes employee and employer contributions).
Health Savings Account Limits
I love Health Savings Account, and frankly, you should too. I view them as the best type of retirement account as you get a tax deduction on any contribution AND if invested, all the growth grows tax-fee (if used for healthcare expenses). See my latest blog on how to keep track of expenses: First Save. Then Invest. Decades Later, Reimburse. https://perkinswa.com/blog/health-savings-accounts-first-save-then-invest-decades-later-reimburse
Roth IRA Compensation Restrictions
The income phase-out range for making Roth IRA contributions has increased. Taxpayers with modified adjusted gross income (MAGI) under the lower end of the ranges shown below can make a full Roth IRA contribution. If you are in the range, you will only be able to contribute a portion of the $6,500 max. These limits do not apply to making Roth 401(k) contributions if your employer allows it.
If your income is too high for the year, consider a backdoor Roth IRA contribution. I do these for my high wage earning clients. It’s not much each year but over many decades, you can easily achieve many hundreds of thousands of dollars in tax-free monies which will likely lower your lifetime tax bill.
If you plan to save the max to your employer sponsored plan this year, be sure to review and potentially change your payroll deferral percentages. Also, if you turn the big five-zero this year, don’t forget about the catch-up provisions.
Happy New Year and Happy Savings!