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Financial Watch | December 2022

Financial Watch | December 2022

December 29, 2022
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What Are Your Retirement Plan Contribution Limits in 2023?

Maximum annual contribution amounts for qualified retirement plans including 401(k)s, 403(b)s, IRAs, SIMPLE IRAs and SEP-IRAs are indexed to inflation, which rose significantly in 2022. That led to the Internal Revenue Service (IRS) announcing a record high increase in annual contribution limits for retirement plans in 2023. The IRS also expanded the income ranges used to determine who is eligible to make a deductible contribution to a traditional IRA or contribute to a Roth IRA. Below we look at what these changes could mean as you pursue your long-term financial goals.1

How much can you contribute to your employer plan?

Participants in employer plans can contribute $2,000 more to their plans next year, when the maximum contribution amount rises from $20,500 in 2022, to $22,500 in 2023. As the table below indicates, participants over age 50 can contribute an additional $7,500 in catch up contributions in 2023, for a total of $30,000 for the year.

How much can you contribute to an IRA?

Maximum IRA contribution amounts will increase by $500 next year. At the same time, the income ranges for determining eligibility to make deductible contributions to traditional IRAs, contribute to Roth IRAs, and claim the Saver's Credit have been expanded. However, since the IRA catch‑up contribution limit for individuals aged 50 and over is not subject to an annual cost‑of‑living adjustment, it remains unchanged at $1,000. Keep in mind, if you’re eligible to make an IRA contribution for tax-year 2022, you have until April 18, 2023, to do so.

4 ways maximizing contributions now can move you closer to your goals

  1. Keep more of your income working for you. Periods of high inflation can make it hard to find extra money to set aside for long-term goals. However, keep in mind that pre-tax contributions to a traditional 401(k), 403(b) or IRA may lower the amount of your income that is subject to taxes, effectively freeing up more money to work for you instead of Uncle Sam.

  2. Harness the power of compounding. The earlier you start saving, the greater the potential benefits, thanks to the power of compounding. Compounding takes place when investment earnings from capital gains or interest are reinvested to generate additional account earnings over time. Your money has the potential to grow even faster when invested in a qualified retirement plan, such as a 401(k), 403(b) or IRA, due to tax-deferred compounding. That’s because earnings generated in qualified plans are not subject to taxes until they’re withdrawn, usually in retirement when you may be in a lower tax bracket.

  3. Take advantage of matching contributions. Many employer retirement plans offer matching contributions, which can exponentially increase the value of your retirement plan assets over time. Make sure you’re contributing enough each year to capture the full match so you’re not leaving free money on the table.

  4. Automate annual deferral increases. If you’re not able to contribute the maximum to your plan now, take advantage of automated annual deferral increases to get closer to your retirement savings goals. Whether or not your plan offers this option, most plans allow you to manually increase your deferral percentage at any time. You can elect to defer up to 100% of your salary or wages each year, up to the plan’s maximum contribution limit as determined by the IRS. (Plan provisions vary by employer. Check with yours for a list of plan features and benefits available to you, including the ability to choose pretax and/or Roth contributions.)

If you have questions about these or other ways to optimize your retirement savings strategy, contact the office to schedule time to talk.

1 “Taxpayers should review the 401(k) and IRA limit increases for 2023.” IRS,  November 21, 2022. https://www.irs.gov/newsroom/taxpayers-should-review-the-401k-and-ira-limit-increases-for-2023#:~:text=The%20amount%20individuals%20can%20contribute,also%20all%20increase%20for%202023.

This information was written by KRW Creative Concepts, a non-affiliate of the Broker/Dealer.

This communication is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.