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The IRS on Friday announced a record increase in contribution limits to 401(k) and other tax-deferred retirement plans by 2023.
Starting next year, you will be allowed to contribute up to $22,500 in your 401(k), 403(b), most 457 plans, or the Thrift Savings Plan for federal employees.
That’s $2,000, or about 9.8%, more than the current federal contribution limit of $20,500. The jump is largely due to inflation, to which the contribution limits are indexed.
The catch-up contribution in the 401(k) and other workplace plans – the amount that plan participants age 50 and older can save in addition to the federal contribution limit – will also get a big boost. In 2023, it will rise to $7,500, 15.4% more than the current $6,500. That means if you’re age 50 or older, you can contribute up to $30,000 in 2023. And that doesn’t count any matching contributions your employer may make.
While the increases could help those hoping to top up their retirement savings, most 401(k) participants don’t save anywhere near the federal limit. Based on an analysis of the 401(k) plans it offers to employers, Vanguard estimates that only 14% of participants maxed out their contributions in 2021, and only 16% of those eligible to make catch-up contributions they took advantage
Contributions to traditional IRAs and after-tax Roth IRAs will also increase to $6,500 of $6,000 currently, an increase of 8.3%. But the IRA catch-up contribution limit remains the same at $1,000.
Eligibility to deduct an IRA contribution or contribute to an after-tax Roth IRA is based on income and access to a workplace retirement plan. (These are IRS rules.) But next year, more people will be able to take advantage.
To put money into a Roth in 2023, your modified adjusted gross income must be less than $153,000 ($228,000 if married joint submission). that’s from $144,000 ($214,000 for joint filers) currently.
For traditional IRAs, in order to deduct at least some of your contributions, your modified AGI must be below $83,000 ($136,000 for joint filers) next year, above $78,000 ($129,000 for joint filers) this year.
If you personally don’t have access to a workplace plan but your spouse does, then your modified AGI must be less than $228,000, compared to $214,000 today, to get any deduction for your IRA contributions.
And be on the lookout: The changes the IRS just announced may not be the only ones planned for next year. More may be on the horizon if lawmakers pass popular legislation that would make several changes to tax-advantaged retirement plans, especially for workers age 50 and older.
That said, the negotiations may change when the provisions come into force. “Some of the problematic 2023 effective dates in the legislation could be pushed back a year or more, but lawmakers will be somewhat constrained by how bills are scored for budget purposes,” said Margaret Berger, partner at Law & Policy Group of Mercer, a benefits consulting firm.
Retirement contribution limits weren’t the only inflation-related news from the IRS this week. He also announced the inflation adjustments that would be made to federal income tax brackets and other provisions for 2023. The result for anyone with earned income: a likely increase in take-home pay early next year.
