Are you ignoring your future retirement needs? That tends to happen when you are younger, retirement is far in the future, and you believe you have plenty of time to save. Some people ignore the issue until late in life and then have to scramble at the last minute to fund their retirement. Others may think their Social Security benefits in retirement will be enough and also need to consider how the future viability of the Social Security program may impact their monthly payments.
The IRS just released the inflation-adjusted retirement plans' maximum contribution amounts for 2023, and the increases are dramatic. This may be the time to start considering funding a retirement plan if you don't have one. If you are already contributing to a tax-favored retirement plan and are looking for ways to increase your annual contribution, these inflation increases will be good news.
Here's a rundown of the various tax-favored retirement plans available and the inflation adjustments of each.
Traditional IRA – This plan allows individuals to make tax-deductible contributions each year to the extent they earned taxable income (basic income from working). There is no age restriction, but the deductibility phases out for some higher-income taxpayers. For 2023 the maximum an individual can contribute is $6,500 (up from $6,000 in 2022). The maximum for individuals aged 50 and over increases to $7,500 (up from $7,000 in 2022). The amount deducted phases out for taxpayers who participate in workplace retirement arrangements such as a 401(k) and have an adjusted gross income (AGI) between $73,000 and $83,000 (up from $68,000 and $78,000 in 2022). The AGI phaseout range for married couples is $116,000 to $136,000, up from $109,000 to $129,000 in 2022.
Roth IRA – Unlike a traditional IRA, where generally contributions to the plan are tax deductible but withdrawals from the plan are taxable, contributions to a Roth IRA aren't currently deductible. Still, payouts in the future are tax-free. As with a traditional IRA, you must have taxable earned income to contribute to a Roth IRA. This plan also allows a contribution in 2023 of up to $6,500 (up from $6,000 in 2022). The maximum for individuals aged 50 and over increases to $7,500 (up from $7,000 in 2022). An individual's contribution to a Roth IRA in 2023 phases out for AGIs between $138,000 and $153,000, up from $129,000 to $144,000 in 2022. For married couples, the phaseout applies when AGI is $218,000 to $228,000, up from $204,000 and $214,000 in 2022. If you have more than one IRA, the limits apply to the total contributions made for the year to traditional and Roth IRAs, not to each.
Employer 401(k) Plans – An employer 401(k) plan generally enables employees to contribute up to $22,500 for 2023 (that's $2,000 more than in 2022) before taxes. In addition, taxpayers aged 50 and over can contribute an extra $7,500 annually (up from $6,500 in 2022), for a total of $30,000. Many employers match a percentage of employee contribution, which can amount to a significant sum for those who stay in the plan for many years.
Health Savings Accounts – Although established to help individuals with high-deductible health insurance plans pay medical expenses, these accounts can also be used as supplemental retirement plans if they have already maxed out their contributions to other plans. Annual contributions for these plans can be as much as $3,850 for individuals and $7,750 for families in 2023.
Tax Sheltered Annuities – These retirement accounts are for employees of public schools and specific tax-exempt organizations; they enable employees to make 2023 annual tax-deferred contributions of up to $22,500, up from $20,500 in 2022. Those aged 50 and over can contribute $30,000, up from $27,000 in 2022.
Self-Employed Retirement Plans – These plans, also called Keogh plans, allow self-employed individuals to contribute 25% of their net business profits to their retirement plans. The contributions are pre-tax (which means that they reduce the individual's taxable net profits), so the actual amount that one can contribute is 20% of the net profits up to a maximum of $66,000.
Simplified Employee Pension (SEP) – This type of plan allows contributions in the same amounts as allowed for self-employed retirement plans, except that the retirement contributions are held in an IRA account under the control of the employee or self-employed individual. These accounts can be established after the end of the year, and contributions can be made for the prior year.
Each individual's financial resources, family obligations, health, life expectancy, and retirement expectations will vary greatly, and there is no one-size-fits-all retirement savings strategy for everyone. Purchasing a home and putting children through college can limit an individual's or family's ability to make retirement contributions; these events must be accounted for in any retirement planning.
Please call this office if you have questions about any of the retirement vehicles discussed above.