Retirement Account Limits For 2023
The retirement plan income limits and the contribution limits just came out. Let’s discuss what that means for you and your retirement in 2023. The income limits and phase-outs we will discuss apply to all of your retirement accounts, whether you have a 401(k), solo 401(k), 403(b), 457, TSP or TSA (employer sponsored plans). The IRAS: Simple, Traditional, and Roth have additional considerations. The last part of the article will discuss how to truly maximize your retirement saving plan.
How do you maximize these limits and take advantage of the tax code for your IRAs?
The 2023 employee contribution you can make is going up. Inside your employer plans like the 401(k), 403(b), and etc., the limits are going from $20,500 up to $22,500. Also rising are total contributions to your retirement plan, which includes basically everything: Your employer/employee, the match, non-deductible back door, the mega back to a Roth contribution, etc. So, it’s going from $61,000 in 2022 to $66,000 in 2023.
Next, the catch-up contribution went up as well. The IRS increased this by $1,000, to $7,500. If you are 50 and over, that means the total IRA contributions from all sources can equal $73,500. Under 50, and your limit is the $66,000 amount.
However, you have to understand there are income phase-outs for your IRA. These kick in at a certain income level. But, sometimes we can miss those if your income is below these thresholds, and you can contribute to your workplace plan and your traditional IRA. You can also choose between the traditional and the Roth. But you can only have an employer sponsor plan if your income hits the phase-out thresholds. So, for singles, if you earn less than $73,000 dollars, you can do the full amount of your traditional IRA, as a deductible contribution. But what if your income is higher? Between $73,000 and $83,000, the ability for tax-deductible contributions phases out.
● 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 an 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.
● For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
The same applies if you’re if you have an IRA phase up for married filing jointly or you are covered by a workplace plan–the phase out is $116,000 to 136,000. As you can see, the phase outs change if you are not covered by a workplace retirement plan.
And then the Roth IRA contribution limit is going from $6,000 to $6,500. For next year, you can now plan on adding another $500. This applies to either your traditional IRA or your Roth IRA. For example, if you’re going to put 6,500 into the Roth IRA, you could put zero into your traditional or you can balance it out and split it up between the two.
The Roth IRA phase-out changed as well. The income range for taxpayers making contributions to a Roth IRA is increased to between $138,000 and $153,000 for singles and heads of household, up from between $129,000 and $144,000. For married couples filing jointly, the income phase-out range is increased to between $218,000 and $228,000, up from between $204,000 and $214,000.
There is also going to be a jump on the number for Simple IRAs. In 2023, the amount is going to $15,500. The catch-up contribution is also up to $3,500. Your total, if you are 50 or older, is $19,000.
Make sure that you are also looking into the Saver’s Credit, which also has an increase. A couple that is filing jointly and earning $73,000 or less would qualify for the Savers Credit. This is a tax credit for simply making a contribution to your retirement plan, any retirement plan, of any amount. You get a tax credit just for making the contribution.
So, these are the new limits that are going into effect for 2023.
Backdoor Roth Conversions The Backdoor Roth is just as it sounds: A way to get retirement funds into a Roth IRA if you cannot contribute because your income is too high. The phase-out limits apply. Let’s be clear, this is not a tax dodge. It’s a strategy used by high-income wage earners to move funds into a tax advantage position. How do you maximize the contribution, it can be very confusing. How do you get the highest amount inside your retirement plan? It all starts with understanding your taxes, and specifically, publication 560. This is the worksheet to figure out the maximum amount you can put into your retirement plan, whether or not it’s a workplace plan or solo 401(k). The math is the same. The only line that’s going to be different is net earnings (which is from self-employment), but the amount that you can put into the plan is still going to be $66,000.
How to get more money into your retirement plan, really quickly?
We are not going to discuss all the math, but to maximize your retirement savings, we can use a Backdoor Roth or a Mega Backdoor Roth. A Backdoor Roth allows you to put money into your IRA and then convert it directly to a Roth IRA. The next step up to increase your after-tax retirement savings by using the Mega Backdoor Roth method.
A word of caution, this has a lot of moving parts, can be complicated, and, if not done exactly right, can result in a larger tax bill than expected. Always make sure you are consulting your tax advisor.
To figure it out, you might be able to find some online calculators, but I would prefer you talk to us in the office so that we can help coordinate and make sure this all works out correctly. Here are the steps:
● For 2023, total 401(k) contributions (pre-tax, after-tax, employer matching contributions, and any other non-elective employer contributions) are capped at $66,000, up from $61,000 for 2022. If you’re 50 or older, the limit is $73,500, up from $67,500 in 2022.
● Subtract the $22,500 pre-tax contribution you make ($30,00 if you’re older than 50) from the annual max 401(k) contribution limit for 2023.
● The resulting maximum Mega Backdoor Roth IRA contribution for 2023 is $43,500, up from $40,500 in 2021 if your employer makes no 401(k) contributions on your behalf.
● If your employer does make matching 401(k) contributions, subtract that amount as well. For example, if you make $200,000 per year and your employer makes a 3% match, subtract the additional $6,000 in matching contribution ($200,000 x 0.03), leaving a maximum Mega Backdoor Roth IRA limit of $37,500 in 2023.
What you can do is this: As long as you earn $66,000 or more, then the difference between that number and $66,000 is what you can add for a Backdoor Roth contribution. If you have enough disposable income, the Mega Backdoor Roth contribution might be an option. You make a non-deductible contribution and then immediately convert it. The resulting money ends up in the Roth.
All this news just came out. Hopefully, this helped you, but if you have any questions, please let me know.