Let's get into the details on the new retirement changes and how to use them starting January 1, 2023.
Find out how seven beneficial IRS retirement-related adjustments for 2023 will help you cut taxes, save more money, and create a stronger financial future.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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Hi friends, and welcome back to Money Girl! My name is Laura Adams. If you're new here, I'm an award-winning personal finance author who's been writing and hosting this show since 2008.
If you’re an existing or budding business owner, don’t miss my latest title which was an Amazon No. 1 New Release. The title is Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers. It would also make a great gift for the aspiring entrepreneur in your life!
My mission is to help you get the knowledge and motivation to prioritize your finances, build wealth, and have more security and less stress. When I'm not podcasting, I work with brands as their on-camera spokesperson, PR consultant, and multimedia content creator. If you want to learn more about my books, money courses, or how to work with me, visit my personal website, LauraDAdams.com.
You probably know that I love retirement accounts because they allow you to accomplish two critical things simultaneously: building wealth and cutting taxes. But various account rules can change from year-to-year based on what's happening in the economy, such as inflation. And since higher prices are sticking around, it's not surprising that the IRS is adjusting rules to be more favorable.
It's essential to stay on top of any annual retirement account adjustments so you can use them to save more. So, stay with me if you want to grow a bigger nest egg and pay less tax. This show will cover seven retirement account changes coming in 2023.
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OK, let's get into the details on the new retirement changes and how to use them starting January 1, 2023.
Starting in 2023, if your employer offers a retirement plan, such as a 401(k) or 403(b), the base amount you can contribute increases from $20,500 to $22,500. The same adjustment applies to most 457 and Thrift Savings Plans (TSPs) if you work for the federal or local government. However, if you have a SIMPLE retirement account, the base limit and increase are smaller, going from $14,000 in 2022 to $15,500 in 2023.
These new limits apply to contributions to traditional (pre-tax) accounts and Roth (post-tax) accounts. Remember that traditional contributions cut taxes in the current year and grow tax-deferred until you make retirement withdrawals. And Roth contributions get taxed upfront, but you take them and your earnings entirely tax-free in retirement. Note that if you have a Roth at work, there are no income limits to qualify.
Workplace retirement accounts also have overall limits that include employer contributions, such as matching. In 2023, they increase from $61,000 to $66,000, or if you're over 50, from $67,500 to $73,500.
You can make changes to your plan at any time during the year. In most cases, you can set a higher contribution rate to begin at a particular time, such as on January 1 each year. So, make a goal to max out your retirement plan by updating your contribution percentage or dollar amount per pay period.
When you're over 50, you qualify for additional catch-up contributions to your 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan. They will be $7,500, up from $6,500. And if you're over 50 with a SIMPLE plan, your catch-up increases to $3,500, up from $3,000.
That means most participants over 50 can contribute $22,500 plus $7,500, or $30,000, starting in 2023. And those with a SIMPLE can contribute $15,500 plus $3,500 or $19,000.
A SEP-IRA and solo 401(k) are two popular self-employed retirement plans. For 2023, the maximum that business owners can put in either plan will be $66,000, up from $61,000.
However, unlike SEP IRAs, solo 401(k)s allow catch-up contributions, giving those over 50 a maximum contribution of $73,500 ($66,000 plus $7,500). That's excellent news for solopreneurs and small business owners who want to save more for retirement.
While IRAs don't allow you to contribute as much as employer-sponsored plans, they're available to anyone with earned income, regardless of age. After several years of no increases, the IRA contribution limit will be $6,500, up from $6,000.
However, the IRA catch-up contribution for those over 50 won't get adjusted and remains $1,000. So, qualifying individuals over 50 can put up to $7,500 in either a traditional or Roth IRA. Note that there are income limits for Roth IRA contributions, and I'll cover them in just a moment.
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If you (or a spouse) only have a traditional IRA, your contributions are fully tax-deductible up to the annual limit. However, if you or your spouse have a retirement plan at work, your traditional IRA deduction may be reduced or eliminated, depending on your income and tax filing status.
Here are the new modified adjusted gross income (MAGI) thresholds for 2023 when you contribute to a traditional IRA and a workplace retirement plan in the same year:
But let's say you don't have a workplace retirement plan, but your spouse does, and you contribute to a traditional IRA. In that case, you get a reduced deduction for your contributions with household income between $218,000 and $228,000 and none above $228,000.
I want to reiterate that these income limits don't apply if neither you nor a spouse is covered by a retirement plan. In that case, you can always contribute to a traditional IRA and get a full tax deduction.
Now, let's switch gears and talk about Roth IRAs. Just like traditional IRAs, the 2023 Roth IRA contribution limit will go up to $6,500 or $7,500 if you're over 50. With a Roth, your contributions are never tax-deductible because you must pay tax upfront.
However, unlike a traditional IRA, as I previously mentioned, annual income limits exist to qualify for Roth IRA contributions. And, yes, they're going up in 2023.
Here are the new MAGI limits by tax filing status for Roth IRA eligibility in 2023:
The higher income limits are terrific because more people will qualify for these valuable accounts that skip taxes on investment growth and give you tax-free income in retirement. Note that you can max out both a Roth IRA and a workplace retirement plan in the same year without the tax conflicts that exist for a traditional IRA.
LISTEN ALSO: Should You Have a Traditional or Roth IRA?
Also known as the saver's credit, it’s an additional tax benefit to encourage low- and moderate-income workers to save. It matches some of what you contribute to an IRA or workplace retirement plan.
You qualify for the saver's credit if you're single or married and file taxes separately with income up to $36,500, up from $34,000. And married couples filing joint taxes qualify when they have a household income of up to $73,000, up from $68,000. And those filing as heads of household qualify with income up to $54,750, up from $51,000.
While this isn't a complete list of every retirement-related tax change coming in 2023, I hope it helps you understand what accounts, tax deductions, and credits you can take advantage of next year.
As always, you can leave a comment or money question by calling 302-364-0308 to leave a voice message. Or send an email using my contact page at LauraDAdams.com.
That's all for now. I'll talk to you next week. Until then, here's to living a richer life.