Time to celebrate and the IRS announces larger contributions limits for retirement plans in 2023! … [+]
Inflation is bringing some good news to retirement savers. At least for those looking to maximize their contributions to retirement accounts like a 401(k), traditional IRA, or 403(b). For those looking to pay fewer taxes in 2023, the increase in the maximum retirement contributions for 2023 will allow you to shelter more of your income from taxes.
Workplace Retirement Plan Contribution Limits for 2023
For those with a 401(k), 403(b), or 457 plan through an employer, your new maximum contribution limit will go up to $22,500 in 2023. This increases $2,000 from the 2022 401(k) contribution limits.
Catch-up contributions are increasing as well. Workers aged 50 or older in 2023 will be allowed to make an additional $7,500 catch-up contribution next year. That means a total of $30,000 can be contributed as an employee of a business.
The employer’s 401(k) maximum contribution limit for the self-employed is even bigger. Altogether, the most that can be contributed to your 401(k) plan between you and your employer is $66,000 in 2023. Additionally, business owners aged 50 or older can make the $7,500 catch-up contribution.
Cash Balance Plan Contribution Limits in 2023
The cash balance plan is my favorite tax-planning tool for high-income business owners. There is no set contribution limit like a 401(k). However, inflation will increase the maximum amount you can contribute to a cash balance plan in 2023.
Your actual allowable contributions each year will be actuarially calculated based on the promised benefits of the pension, the participant’s age, and the plan’s current funding. In 2023, a pension plan’s maximum allowable defined benefit increases from $245,000 to $265,000 of retirement income per year.
If you are making $500,000 or more per year and would like to save more on a pre-tax basis for retirement, talk with your tax professional and tax-planning financial advisor to see if you could benefit from setting up a cash balance pension plan.
IRA Contribution Limits Set to Increase in 2023
The contribution limits for both Roth IRA and traditional IRAs will increase in 2023. The new contribution limit is $6,500, up from $6,000 in 2022. Unfortunately, the IRA catch-up contribution is still just $1,000.
To be eligible to contribute to a Roth IRA in 2023, your modified adjusted gross income (MAGI) must be under $153,000 or $228,000 if married and filing jointly. That is up from the 2022 levels of $144,000 ($214,000 married filing jointly).
Take a look at what you are currently saving for retirement and strive to increase your contributions each year. When planning for retirement, don’t assume that just because you are maxing out your retirement account contribution limits each year, you are saving enough to replace your income once you leave the workforce.
If nothing else, use the tax savings from your pre-tax contributions to your 401(k), cash balance pension plan or profit-sharing plans as motivation to save a bit more. This could save you tens of thousands of dollars in taxes over the next decade. For the high-income business owners reading this, the tax savings could be in the millions of dollars if you optimize the benefits of both a profit-sharing and a cash balance pension plan.
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