We’re all feeling the effects of inflation. Energy, food, rent and other key expenditures have been surging. While economists can argue over the causes, it’s clear that we are experiencing it and that it is proving more persistent than previously expected. Many provisions of the tax code have cost-of-living adjustments (“COLA”) that are intended to offset inflation impacts. In 2001, this became true for retirement savings as contribution limits became pegged to inflation. The IRS recently announced the amount investors can contribute to their retirement accounts for 2023.
Before we look at discretionary retirement savings plans, let’s first take a quick look at Social Security. The Social Security Administration announced a COLA adjustment from 2022 to 2023 of 8.7%, the largest increase in more than 40 years. This change will take effect in January of 2023 and will be well-received by retirees on fixed incomes, who are one of the groups most adversely affected by inflation.
There are several key changes for discretionary retirement savings. The contribution limit on individual retirement accounts (“IRAs”) increased from $6,000 to $6,500 (an 8.3% increase). Moreover, the contribution limit for employees who participate in 401(k), 403(b), and most 457 plans increased to $22,500 from $20,500 (a boost of 9.8%). For those who participate in a small business retirement plan, the amount individuals can contribute to their Simple IRAs increased to $15,500, up from $14,000 (a whopping 10.7% increase). In addition, the amount one can contribute to a SEP IRA increased to $66,000 for 2023, up from $61,000 (cannot exceed 25% of gross income). The “catch up” provision for savers over 50 years of age had some slight modifications as well. Participants in 401(k), 403(b) and 457 plans saw their “catch up” contribution increase to $7,500, up from $6,500. Simple IRA “catch up” contributions increased to $3,500, up from $3,000. The “catch up” provision for savers over 50 years of age did not change for Traditional and Roth IRAs, remaining at $1,000.
Getting into details a bit, we also saw substantial improvements in eligibility thresholds and “phase out” ranges (i.e., income levels at which either tax-deductibility or eligibility is reduced). As a reminder, there are two types of IRAs (i.e., traditional and Roth). Traditional IRA contributions can often be tax-deductible while Roth contributions cannot. Roth IRAs, however, are not subject to specific requirements on withdrawal timing, and withdrawals are not taxed. Therefore, required minimum distributions (“RMDs”) for traditional IRAs start in the year when taxpayers turn 72, while Roth IRAs have no such requirement. Eligibility for each IRA type depends on income (i.e., your “modified adjusted gross income” from one’s tax return). In summary, the income phaseout ranges for tax-deductibility of traditional IRAs in 2023 are as follows:
For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to between $73,000 and $83,000, up from between $68,000 and $78,000.
For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to between $116,000 and $136,000, up from between $109,000 and $129,000.
For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is increased to between $218,000 and $228,000, up from between $204,000 and $214,000.
Roth IRAs are never tax deductible, but there are income levels above which one can no longer contribute to a Roth IRA. The income phase-out range for taxpayers to be eligible for a Roth IRA contribution are as follows:
For singles and heads of household, the phase-out range is between $138,000-$153,000, which is up from $129,000-$144,000.
For married couples filing jointly, the phase-out range is between $218,000-$228,000, which is up from $204,000-$214,000.
Taking advantage of these increases can help reduce the amount of tax you pay and at the same time help you save for retirement.