Well, here we are, nearing the end of another year. Now is the time where people commonly wrap up their to-do list before December 31st hits and anticipate what might change for the year ahead. Financially speaking, updates to retirement plan contributions is typically one of those items that should be reviewed. In a move driven by soaring inflation, the IRS has increased maximum retirement contributions for 2023.
Last month, the IRS announced myriad inflation adjustments, including a Social Security cost-of-living adjustment (COLA) of 8.7% that will impact 70 million Americans. We haven’t seen adjustments like these since 1981, making it the highest increase in 40 years. Also affected: higher standard deductions and tax brackets, plus increases in wealth transferred without gift or estate tax.
Read on to see if these updates will impact you.
Effects of Record-High Inflation
Inflation isn’t all bad. In fact, some retirees might experience fortuitous benefits. However, the effects of record-high inflation have been felt by everyone. Now, thanks to the latest cost-of-living adjustment, those receiving Social Security benefits will welcome, on average, an additional $150 per month starting in January.
And for those contributing to retirement accounts, you’ll also be able to contribute more in 2023.
401(k) Contribution Limits for 2023
If you have an employer-sponsored 401k, 403b, or 457 plan, your maximum contribution limit will increase to $22,500 in 2023. This is a $2,000 increase on 2022 contribution limits.
Catch-up contributions will increase, too. Those aged 50 or older will be eligible to make an additional $7,500 catch-up next year, bringing their total contribution up to $30,000 in 2023.
IRA and Roth IRA Contribution Limits for 2023
For those contributing to non-employer-sponsored retirement savings accounts, annual limits will increase for traditional and Roth IRAs up to $6,500 in 2023.
Take note that Roth IRAs do have income limits:
- For single filers, that’s $138,000 to $153,000 (up from $129,000 to $144,000)
- For married couples filing jointly, that’s $218,000 to $228,000 (up from $204,000 to $214,000 in 2022).
- For those individuals that are married and filing separately, the range has stayed the same.
Unfortunately, the IRS did not raise the catch-up contributions on traditional or Roth IRAs.
You can see the full IRS breakdown here. Note: it’s a 28-page document that covers all changes coming in 2023.
So, Should Your Saving Strategy Change in Response to the IRS Updates?
If you’re wondering if you should increase your contributions next year just because you can – ultimately, that comes down to your financial situation. Do you currently contribute the maximum each year? A recent Vanguard study found that only 14% of Vanguard 401k account holders contributed the maximum amount allowed. And we know what you’re thinking, but you’d be surprised to learn that a whopping 58% of those people make over $150,000 annually!
So, if you’re feeling the pressure to contribute more in 2023, consider the following.
- If a percentage of your contributions is matched by your employer, you should absolutely contribute enough to earn the match. Otherwise, you’re just losing out on free money.
- If you still have additional money to invest, consider the tax benefits of opening a Roth IRA. You can contribute to a Roth IRA and 401k simultaneously if you meet the income requirements.
- Experts recommend investing 12% – 15% of your annual income towards retirement. Can you ramp up your contributions?
- No matter where you are, review your retirement plan and try boosting it over time to maximize your contributions. And most importantly, contribute early and
- Refrain from assuming that maxing out each year means saving enough to replace your income in retirement.
- Take advantage of pre-tax contributions to save more! This could equate to a savings of tens of thousands of dollars over the next decade. (And for high-income business owners, your tax savings could be in the millions of dollars!)
In 2023, the effects of inflation and a cost-of-living adjustment will enable eligible individuals to contribute more to their retirement accounts than they could before. However, just because you can increase your contributions to these accounts doesn’t mean you must. Instead, it would be wise to focus on attaining your employer match and increasing your annual savings over time.
If you need help navigating these changes and their impact on your retirement savings, schedule your 15-minute introduction call today!