In the positive impacts of inflation category comes news from the Internal Revenue Service of the largest ever increase in contribution limits to 401(k) plans and other federal savings programs.
The amount individuals can contribute to 401(k) plans will rise to $22,500 in 2023, from $20,500 in 2022. The same increase applies to 403(b) plans, most 457 plans and the federal government’s Thrift Savings Plan.
The catch-up contribution limit for employees 50 and over will go from $6,500 in 2022 $7,500 in 2023. The increase means participants can contribute a total of up to $30,000 starting in 2023 – a $3,000 boost from 2022.
The $7,500 catch-up contribution limit applies to anyone who turns 50 or older in 2023.
Catch-up provisions provide an opportunity for workers 50 and older to contribute more to their retirement savings and especially helps those who haven’t been able to contribute maximum amounts in the past. The pre-tax contributions also let taxpayers reduce taxable income even further.
“Because all the limits have gone up, it allows folks who are already putting in the maximum amounts to save more and get the tax benefits.” — Evan Press, financial professional with Equitable
“Because all the limits have gone up, it allows folks who are already putting in the maximum amounts to save more and get the tax benefits,” said Evan Press, financial professional with Equitable. “Given inflation has been so high, it’s important for people to save what they can. When it comes time to take money out of these vehicles in retirement, they will need more income to keep up with this higher inflation. Being able to save more in a tax advantaged space always helps.”
Press said adjustments to the income thresholds will also help more people take advantage of the retirement plans.
“The thresholds are a barrier to entry for some…Those who may now meet the criteria may be incentivized to put more away into these types of plans,” he said.
“For those individuals who are approaching retirement, these increased limits are very important because they can fund their retirement much more quickly," said Cindy Sandomenico, CPA, employee benefit advisor for Wiss & Co. "For those individuals who are over 50, however, the 401(k) catch-up contribution limit will increase by $1,000 to $7,500 in 2023.
"The increase was one of the largest increases ever to the 401(k) contribution limits, so this is a big deal for everyone contributing to their retirement plans." she said, adding, "The employee contribution limit for 401(k) and similar plans increases $2,000 to $22,500 in 2023. I recommend maxing out their contributions and also taking advantage of the catch-up contribution if you are over 50. However, if you cannot afford to contribute the maximum amount per the IRS limits, make sure you are contributing at least enough to get the maximum employer contribution if your plan offers one."
Income threshold raised
The income threshold for which IRA contributions no longer become tax-deductible will be raised for both single and married filers. For Roth IRAs, the income range for which eligibility phases out will also be set higher in 2023.
Janet Walker, co-owner of GenWealth Financial Advisors said the 401(k) changes could amount to an additional $57,000 of retirement assets if an investor contributes the additional $2,000 per year and only makes an average 8% return from age 50 to 65.
“And that scenario does not take into account any match,” she said. “But if you are still getting even a 50% match, the increases retirement assets then could total $86,000.”
This increase comes at a time when inflation is hitting family spending power, Walker said.
“If you are Age 50+, you might also be an empty nester or preparing to be one soon,” she added. “Even with increased prices for purchases, many in this age group have more spending freedom than they previously had now that the kids are ‘grown and flown.’ The key is to take at least a portion of that and add it to your retirement nest egg.”
Separately, this week the IRS announced higher federal income tax brackets and standard deductions fora next year. The IRS also announced other adjustments, raising the limit for contributions to health flexible spending arrangements to $3,050, up from $2,850 for 2022.
The changes all come as a result of spiraling inflation in which consumer prices rose 8.2% in September, compared to last year.
Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].