The month of October is Financial Planning Awareness Month and National Retirement Security Month. So, with October coming to a close, it's perfect timing for the IRS to have announced the 2023 increases to contribution limits to employer retirement plans and IRAs. Take a look at what these new contribution limits may mean for you.
To provide for your retirement security, saving for when that paycheck stops is imperative. Fortunately, the IRS will be allowing you to do more of that now. The contribution limit for employer retirement plans and IRAs has jumped - a nice side benefit to inflation. Participants in a 401(k), 403(b), 457 and the federal government's Thrift Savings Plan can contribute up to $22,500 in 2023 plus an additional $7,500 catchup contribution if you're age 50 or over (for a max of $30,000).Max IRA and Roth IRA contributions have increased to $6,500 plus an additional $1,000 if age 50 or over. The income phase-out for determining eligibility for contributing to a Roth IRA will be $138k-$153k single or head of household and $218k-$228k for married filing jointly.
The IRS will also be making it even more affordable to make larger contributions to retirement savings by having significantly increased the standard deduction and the tax brackets, thereby reducing your income tax.
Even if you maximize contributions to an employer retirement plan, you can still contribute to an IRA if you have enough earned income to count towards both. Your deduction for a contribution to a Traditional IRA may be limited when you or your spouse contribute to a retirement plan, but it may still be beneficial to contribute to an IRA on a nondeductible basis. The contribution could enjoy tax-deferred growth, which maximizes the potential to accumulate more money. When it comes time to take distributions, some portion would come out tax-free due to that nondeductible contribution creating tax basis. Every little bit helps.
Making a nondeductible contribution to a traditional IRA could also give you the opportunity to do a backdoor Roth IRA, if you have no other pre-tax balances in IRAs, SIMPLE IRAs, or SEP IRAs. Having a pre-tax balance in these other accounts could cause a portion of the backdoor Roth IRA to be taxable on conversion of the traditional IRA to a Roth IRA. However, you could possibly roll those pre-tax balances up into an employer retirement plan to “clear the deck” for doing backdoor Roth IRAs.
If you have a side business, you may be able to contribute to a retirement plan for that business, even if you contribute to an employer retirement plan at work. There are different types of retirement plans, so the right fit would depend on the structure and income of your side business, the type of employer retirement plan you participate in elsewhere and what you contribute to that.
Life and finances are surely a balance, but these increased limits enable you to put more aside for later. It’ll be here faster than you think. Typically, you can accumulate more money when the balance can grow tax-deferred, so these vehicles can be a great place to save for retirement.
If you have any questions or are interested in learning more about this topic, we’re here to help. Please do not hesitate to reach out to our trusted experts today.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.