The IRS released its annual cost-of-living adjustments for retirement savers in 2023, increasing the contribution limits and income eligibility requirements in the new year. One week previously, the Social Security Administration announced an 8.3 percent increase in Social Security and Supplement Security Income benefits, which it expects will help retirees weather higher consumer prices and persistent inflation in the year ahead.
Employer-Sponsored Retirement Plans
The maximum amount individuals may contribute to an employer-sponsored 401(k) or 403(b) plan via salary deferral in 2023 increases to $22,500 from $20,500 in 2022. Catch-up contributions for employees age 50 and older also increase from $6,500 in 2022 to $7,500 in 2023, allowing those individuals to contribute as much as $30,000 to their qualifying plans in the new year.
While employees generally have until Dec. 31, 2023, to make their 2023 401(k) contributions, business owners with Schedule C income have until April 15, 2024, to contribute a salary deferral to their plans and make an employer match. For self-employed taxpayers with solo 401(k)s, the maximum amount they may contribute to those plans in 2023 is $66,000, up from $61,000 in 2022. This limit includes taxpayers’ elective salary deferrals and the profit-sharing contributions made by their businesses. Contributions to SIMPLE retirement accounts (also known as SIMPLE IRAs) also increase in 2023 to $15,300, from $14,000 in 2022.
Also changing for 2023 are the IRS’s definition of highly compensated employees and its annual compensation limits. More specifically, the law defines a highly compensated employee as one who earned more than $150,000 in 2022, up from $135,000 in 2021, and the maximum annual compensation that can be considered for plan contributions increases to $330,000, up from $305,000 in 2022. This compensation limit change is crucial as it impacts most employer-matching contribution calculations.
Individual Retirement Accounts (IRAs)
For 2023, the limit on traditional IRA and Roth IRA contributions increases to $6,500 plus an additional $1,000 for taxpayers age 50 or older. Generally, IRA contributions may be deductible when you or your spouse is covered by a workplace retirement savings plan, such as a 401(k). However, depending on your filing status and gross income, the amount of the deduction may be reduced or phased out completely based on the following schedule:
Similarly, the income phase-out range for taxpayers making contributions to Roth IRAs increases in 2023 to between $138,000 and $153,000 for singles and heads of household, up from between $129,000 and $144,000 in 2022. For married couples filing jointly, the income phase-out range increases to between $218,000 and $228,000 from $204,000 and $214,000 in 2022. The phase-out range for a married individual filing a separate tax return who contributes to a Roth IRA is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
If a taxpayer earns too much income to contribute to a Roth IRA in 2023, they may instead contribute to a traditional IRA and later convert that account to a Roth for the benefit of tax-free distributions after reaching age 59½, provided they own the Roth IRA for a minimum of five years. While this “back-door IRA” remains legal under current tax law, it is subject to change based on future legislation and modifications to the tax code.
The deadline for making an annual contribution to a traditional IRA or a Roth IRA is the federal tax filing deadline. Therefore, barring any postponements to the filing deadline, taxpayers have until April 15, 2024, to make their 2023 IRA contributions. This additional time allows individuals to assess their tax liabilities at the end of the year and determine whether it is more beneficial to claim the deduction for that year by contributing to a traditional IRA or paying taxes now on contributions to a Roth IRA, for which future withdrawals in retirement will be tax-free.
About the Author: Olga Ismail is the head of Retirement Plan Consulting and a financial advisor with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with PWA Securities, LLC (PWAS). She can be reached at the firm’s Fort Lauderdale, Fla., office at (954) 712-8888 or info@provwealth.com.
Provenance Wealth Advisors (PWA), 200 E. Las Olas Blvd., 19th Floor, Ft. Lauderdale, FL 33301 (954) 712-8888.
Olga Ismail is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult with your financial advisor about your individual situation.
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Updated February 5, 2024