IRS to Make Largest Increase Ever to 401(k) Contribution Limit

Millions of Americans can save more on retirement accounts next year, following the inflation adjustments made on Friday by the Internal Revenue Service.

The employee contribution limit for 401 (k) and similar job plans will rise from $ 2,000 to $ 22,500 by 2023, the largest ever increase in dollars and percentage terms, according to benefits provider Milliman.

The amount that taxpayers can contribute to an individual retirement account will be $ 6,500 by 2023, up from $ 6,000. The limit hasn’t changed since 2019.

The amount of the 401 (k) recovery contribution allowed if you are 50 or older will increase from $ 1,000 to $ 7,500 for 2023. The recovery contribution limit for personal retirement accounts, which is not subject to adjustments for inflation remains at $ 1,000.

For workers in companies that allow special after-tax contributions and self-employed people who have 401 (k) or SEP individual pension plans, there is a total contribution limit of $ 66,000 for 2023, an increase of $ 5,000 compared to this year. This includes contributions from employees and employers. With the recovery contributions in addition, older savers can contribute up to $ 73,500 in 2023 to these plans.

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The retirement news follows Tuesday’s announcement of adjustments to income tax bands and dozens of other adjustments including the exclusion of inheritance and gift tax, made annually according to the formulas set by Congress.

The higher limits offer a great saving opportunity.

“You may not feel the pinch now, and you will reap the rewards later in retirement,” says Maria Bruno, head of US wealth planning research at Vanguard, which manages retirement plans for nearly five million participants.

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In Vanguard’s retirement savings plans during 2021, 14% of participants saved the maximum amount of $ 19,500 ($ 26,000 for people aged 50 and over). Six out of 10 participants with income over $ 150,000 made payback contributions.

37% of households owning traditional IRAs or Roth IRAs in mid-2021 made contributions in fiscal 2020, according to the Investment Company Institute. The average grant amount was $ 5,000.

Adjustments for inflation also apply to income thresholds that determine whether taxpayers can deduct IRA contributions on their tax returns and whether taxpayers can contribute to a Roth IRA.

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In 2023, the deduction for taxpayers who make contributions to a traditional IRA is phased out for singles and heads of household who are covered by an on-the-job retirement plan and have changed their adjusted gross income between $ 73,000 and $ 83,000, from $ 68,000 and $ 78,000 this year. For married couples filing jointly, where the spouse making the IRA contribution is covered by an on-the-job retirement plan, the deduction is phased out for taxpayers with income between $ 116.00 and $ 136,000 for 2023, from $ 109,000 to $ 129,000 this year.

For a saver who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction for traditional IRA contributions is phased out if the couple’s income is between $ 218,000 and $ 228,000 in 2023, compared to between $ 204,000 and $ 214,000 this year.

For Roth IRAs, where the money you contribute is after-tax, eligibility to contribute is based on income. Once you are in a certain income bracket, the amount you can contribute to a Roth IRA is reduced, until you reach the income level where contributions are no longer allowed.

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In 2023, the Roth IRA income bracket where eligibility gradually drops is between $ 218,000 and $ 228,000 for married couples filing a joint application, compared with $ 204,000 to $ 214,000 this year. For singles and heads of households, the income bracket is between $ 138,000 and $ 153,000 in 2023, compared to $ 129,000 and $ 144,000 this year.

If you earn too much to get a deduction for contributing to an IRA, you can still contribute, it just won’t lower your tax bill.

If you make too much money to open a Roth IRA, you can open a non-deductible IRA and convert it to a Roth IRA in a move known as a Roth IRA backdoor.

The adjustments are designed to keep your retirement savings in step with inflation. “If investors can increase their contributions, that money has the power to increase immensely over time,” says Ms. Bruno.

Write to Ashlea Ebeling at [email protected]

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