On Oct. 21, the IRS announced new contribution limits for 401(k)s and IRAs for 2023 based on cost-of-living adjustments.
DEFINED CONTRIBUTION PLANS: According to IRS Notice 2022-55 (tinyurl.com/2hjufke8), the amount that individuals can contribute to their defined contribution plans in 2023 is increasing $2,000 from 2022 to $22,500. The new limit applies to 401(k) plans; 403(b)s (described by the IRS as "offered by public schools and certain charities"); most 457 plans (deferred-compensation plans for government and non-government employees); and the federal government's Thrift Savings Plan.
How many people are affected by the change in the maximum amount? As a means of comparison, the "How America Saves 2022" report by Vanguard (tinyurl.com/yv2efd86), an investment management firm, used retirement plan data from 5 million defined contribution plan participants to find that an estimated 14% saved the maximum amount in 2021.
The catch-up contribution limit (which applies to employees ages 50 and older) also increases for defined contribution plans. The limit rises $1,000 for 2023 to $7,500. That means those 50 and older can contribute up to a total of $30,000 to those plans in 2023. Those under 50 are limited to $22,500.
If you add employer contributions, the combined employer and employee limits increase to $66,000, up $5,000 from 2022. The limit is $73,500 if you have catch-up contributions (tinyurl.com/mt9hzwja).
IRAs: For individual retirement accounts, the limit on annual contributions increases $500 in 2023 to $6,500. The IRA catch-up contribution for ages 50 and older remains $1,000.
Whether you can deduct your contribution to a traditional IRA depends on your income. As the IRS points out: "If during the year either the taxpayer or the taxpayer's spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income" (tinyurl.com/433e3447).
The phase-out income ranges for traditional IRAs in 2023, based on modified adjusted gross income (MAGI), are:
-- For single taxpayers covered by a workplace retirement plan, the range is between $73,000 and $83,000, an increase from 2022 of $5,000 for each figure.
-- For married couples filing jointly, if the spouse who makes the IRA contribution is covered by a workplace retirement plan, the range is between $116,000 and $136,000, an increase from 2022 of $7,000 for each figure.
-- For someone who contributes to an IRA but is not covered by a workplace retirement plan, but is married to someone who is covered, the range is between $218,000 and $228,000, an increase from 2022 of $14,000 for each figure.
Roth IRAs are not tax-deductible, but only those making less than certain amounts can contribute. The MAGI phase-out range in 2023 is between $138,000 and $153,000 for singles and heads of household, with each figure $9,000 more than in 2022. For married couples filing jointly, the range is between $218,000 and $228,000 (up $14,000 each from 2022).
While phase-out charts for 2023 have not yet been posted on IRS.gov as of this writing, you can see the charts for 2022 for traditional IRAs (tinyurl.com/32pv62uk and tinyurl.com/yhma6r8p) and Roth IRAs (tinyurl.com/3bhbcph3).
Will the new levels encourage you to save more? A recent survey of more than 2,300 Americans by Bankrate, a consumer financial services company, found that 55% said their retirement savings were "not where they needed to be" (tinyurl.com/3urz9zdm). Of those who said they were contributing the same or less to retirement than the previous year, the most-cited reason (54%) was inflation.
Whether or not you contribute the maximum amounts permitted, the challenge remains to balance saving for your future retirement against current consumption. Looking back from the future, will you be happy with the choices you made today? Did you take advantage of the time it takes to have compounding work for you? Time is both powerful and fleeting. We'll talk more about how to put compounding to work for you in a future column. Write to me (firstname.lastname@example.org) if you would like to participate in that discussion through the column.
On another note: Tell all your friends and relatives to compete for the 401(k)Champion Award, which is a pro bono initiative that I sponsor. You have a few more weeks to submit your essay (the deadline has been extended to Nov. 17). Go to 401kchampion.com for more details.
DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION