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The Internal Revenue Service (IRS) evaluates the impact of inflation and other variables each year to determine the maximum contributions for tax-advantaged retirement plans. They have been the same for some years. However, on occasion, the IRS modifies the amount that can be saved to your 401(k) and individual retirement account (IRA) to reflect the cost of living adjustments (COLAs).
The modifications for 2023 are significant. Here is all you should know about 401(k) and IRA contribution limits for 2023 and how to maximize your retirement savings.
What Is the Maximum IRA and 401(k) Contribution?
The IRS increased the annual IRA contribution cap from $6,000 to $6,500 for 2023. The contribution cap applies to all your IRAs combined, so if you have a conventional IRA and a Roth IRA, your contributions to both accounts cannot exceed $6,500. The $1,000 catch-up payment for people over 50 is not subject to COLA increases.
The 401(k) contribution cap will rise to $22,500 in 2023 from $20,500 in 2022. The Thrift Savings Plan (TSP) of the federal government, most 403(b), and some 457 plans are all subject to this contribution cap. The catch-up payment for people over 50 increased from $6,500 to $7,500.
How to Understand IRA Income Restrictions
You can frequently deduct contributions from your income if you have a conventional IRA. However, depending on your income and tax status, the ability to deduct your IRA contributions goes away if you or your spouse participate in a retirement plan at work. You can still deduct, but not fully, when your income reaches a particular threshold. You cannot deduct any IRA contributions after you have reached the top phase-out limit.
The income limitations in 2023 are:
You have a stronger chance of being able to deduct payments to an IRA if you have a corporate retirement plan, most likely a 401(k), which encourages you to use more than one kind of tax-advantaged retirement account.
It’s essential to note that for 2023, the income thresholds for Roth IRA contributions have also been slightly raised.
Depending on your income and tax status, you can make contributions to a Roth IRA with income phase-outs:
For Roth IRA contributions, the income phase-out range remains zero to $10,000 if you’re married and filing separately.
Limits on 401(k) and IRA contributions: Using All Available Means
There is at least one benefit to living in inflationary times if you can take advantage of the higher IRA and 401(k) contribution limits and the additional catch-up amounts for individuals over 50.
You can boost the amount you set aside if you aren’t making the maximum contribution to your retirement account. Discuss with your human resources department the possibility of having a small portion of each paycheck deposited into a 401(k) or IRA. Even though it might not seem like much now, compounded returns over the years can significantly impact the performance of your whole portfolio.
If you are eligible, another strategy is to think about funding a Health Savings Account (HSA) to benefit from those tax advantages. Your HSA can also help you cover medical expenses when utilized as a part of a retirement plan; it may even act as a backup IRA after you turn 65.
Taking charge of your overall retirement plan
Consider consulting a retirement expert to learn how to maximize your future based on the types of accounts you are eligible to contribute to. In some circumstances, a plan that utilizes a 401(k), Roth accounts, and both traditional and Roth accounts can improve the overall tax efficiency of your retirement portfolio.
You can ensure that your retirement goals align with your other financial goals by taking a holistic approach. Think about talking with a retirement expert to get their opinion on your strategy and help you stay on course.
M. Dutton and Associates is a full-service financial firm. We have been in business for over 30 years serving our community. Through comprehensive objective driven planning, we provide you with the research, analysis, and available options needed to guide you in implementing a sound plan for your retirement. We are committed to helping you achieve your goals. Visit us at MarvinDutton.com . Tel. 212-951-7376: email: [email protected].