In November 2022, the Internal Revenue Service (IRS) announced inflation-induced changes to its contribution limits for 401(k) retirement plans and individual retirement accounts (IRAs) for the 2023 tax year. Discover the changes so you can plan accordingly.
401(k) Contribution Limits for 2023
For 2023, the 401(k) plan contribution limit for employees is $22,500 ($30,000 for individuals age 50 and over). This is a $2,000 increase from the 2022 limit for individuals under age 50, and a $3,000 increase from the 2022 limit for individuals age 50 and over.
Note, the above limits relate to employee contributions. The IRS allows employers to contribute additional amounts to their employees’ 401(k) accounts.
For 2023, the total contribution limit for an employer-sponsored plan (employee portion plus employer portion) is $66,000 ($73,500 for individuals age 50 and over). For 2022, the total contribution limit was $61,000 ($67,500 for individuals age 50 and over).
It is important to note that the employee contribution limits are aggregate limits and apply to all qualified retirement plans in which an individual participates in any year.
Also, the total contribution limits apply on a per plan basis. They are not aggregated. As a result, if you were to participate in multiple 401(k) plans in one calendar year, each of your employers could max out their contribution. However, for each plan, total contributions (employee portion plus employer portion) cannot exceed 100% of the employee’s earnings.
Did you know?
The changes outlined extend beyond 401(k) plans. They also pertain to other qualified, employer-sponsored retirement plans, including 403(b) plans, most 457 plans and the Thrift Savings Plan.
Source:
Internal Revenue Service
IRA Contribution Limits for 2023
For 2023, the IRA contribution limit is $6,500 ($7,500 for individuals age 50 and over). This is a $500 increase from the 2022 limit, regardless of age. This is an aggregate limit and applies to all IRAs held, regardless of type.
In addition to the contribution limit changes, the IRS also increased the income phase-out ranges for IRAs. The rules differ for traditional accounts and Roth accounts.
Traditional IRA Income Phase-Out Ranges for 2023
The traditional IRA income phase-out ranges are complicated. Fundamentally, they apply to tax filers that either directly participate in an employer-sponsored retirement plan or indirectly do so through a spouse.
For single and head of household taxpayers covered by a workplace retirement plan, the phase-out range is $73,000 to $83,000 for 2023, up from $68,000 to $78,000 for 2022.
For married couples filing jointly, if the spouse making the IRA contribution is covered by an employer-sponsored retirement plan, the phase-out range is $116,000 to $136,000, up from $109,000 to $129,000 for 2022.
For an IRA contributor who is not covered by an employer-sponsored retirement plan but is married to someone who is covered, the phase-out range is $218,000 to $228,000, up from $204,000 to $214,000 for 2022.
For a married individual filing a separate return who is covered by an employer-sponsored retirement plan, the phase-out range remains $0 to $10,000.
Roth IRA Income Phase-Out Ranges for 2023
The Roth IRA income phase-out ranges apply to everyone, regardless of direct or indirect participation in an employer-sponsored retirement plan.
For single and head of household taxpayers, the phase-out range is $138,000 to $153,000 in 2023, up from $129,000 to $144,000 for 2022.
For married couples filing jointly, the income phase-out range is $218,000 to $228,000 in 2023, up from $204,000 to $214,000 for 2022.
For married individuals filing separately, the phase-out range remains $0 to $10,000.
The phase-out rules prevent you from contributing to a Roth IRA if you earn a relatively high amount of income. However, the Internal Revenue Code contains a loophole that allows you to circumvent this restriction via a strategy known as the “backdoor Roth IRA.” Essentially, it entails funding a traditional IRA with after-tax dollars and, subsequently, converting the contribution into a Roth IRA.
I've delved extensively into retirement planning and IRS regulations, keeping up with the 2023 updates and understanding their impact. Let's dive into the nuances of the changes announced by the IRS for 401(k) and IRA contribution limits for the tax year 2023.
401(k) Contribution Limits for 2023:
- The 401(k) plan contribution limit for employees in 2023 is $22,500, which marks a $2,000 increase from the previous year for individuals under 50. For those aged 50 and over, the limit is $30,000, a $3,000 increase from 2022.
- Employers can add extra contributions, making the total contribution limit for an employer-sponsored plan $66,000 for individuals under 50 and $73,500 for those aged 50 and above.
It's crucial to note that these contribution limits are aggregate and encompass all qualified retirement plans an individual participates in during a year. Also, these limits apply per plan, not combined across multiple plans. However, the total contributions (employee and employer portions) within a plan cannot exceed 100% of the employee’s earnings.
Beyond 401(k) plans, similar changes extend to other qualified, employer-sponsored retirement plans such as 403(b) plans, most 457 plans, and the Thrift Savings Plan.
IRA Contribution Limits for 2023:
- The IRA contribution limit for 2023 is $6,500, with a $500 increase from the previous year, applicable to all individuals regardless of age.
- The limit remains an aggregate, applying to all IRAs held, irrespective of type.
Aside from the contribution limit adjustments, the IRS has expanded the income phase-out ranges for both traditional and Roth IRAs.
Traditional IRA Income Phase-Out Ranges for 2023:
- These ranges vary based on tax filers participating directly or indirectly in an employer-sponsored retirement plan or through a spouse.
- For singles and heads of household covered by a workplace retirement plan, the phase-out range is $73,000 to $83,000.
- For married couples filing jointly, the phase-out range is $116,000 to $136,000 if the contributing spouse is covered by an employer-sponsored plan.
- Different ranges apply for contributors not covered by an employer-sponsored plan but married to someone who is covered, as well as for married individuals filing separately.
Roth IRA Income Phase-Out Ranges for 2023:
- The phase-out ranges for Roth IRAs remain irrespective of direct or indirect participation in an employer-sponsored retirement plan.
- Singles and heads of household have a phase-out range of $138,000 to $153,000.
- Married couples filing jointly have an income phase-out range of $218,000 to $228,000.
- Married individuals filing separately have a limited phase-out range of $0 to $10,000.
These phase-out rules prevent high-income earners from contributing directly to Roth IRAs, but there's a strategy called the "backdoor Roth IRA" that involves funding a traditional IRA with after-tax dollars and converting it into a Roth IRA, circumventing this income restriction.
