The Internal Revenue Service (IRS) announced the adjustments affecting dollar limitations for workplace retirement plans and other retirement-related items for 2023. Here, in plain English, are some of the highlights that could well affect you.

Please understand that the information below ONLY deals with the two most common tax filing statuses of Single or Married Filing Jointly. The rules and thresholds for the other tax filing statuses (including Married Filing Separately, Head of Household) can be substantially different. Please consult your tax professional for this information.

1) YOUR EXISTING 401k PLAN

There can be small differences between 401k plans, 403b plans and 457 plans but for the sake of simplicity, I will refer here to the most common one, the 401k plan.

The basic annual contribution limit for 2023 for employees who participate in any of these three plan types has been increased from $20,500 to $22,500. The annual “catch-up” contribution limit for employees aged 50 and over who participate in 401k plans has also been increased from an additional $6,500 to an additional $7,500 in 2023, so those older employees can now contribute up to a total of $30,000.

The amount referred to above is purely employee contributions and does NOT include any employer match which, if offered, is additional to the employee contribution.

Employee contributions to these plans are not subject to any income limits.

2) TRADITIONAL IRAs

The overall annual contribution limit for individual retirement accounts (Traditional and Roth combined) has been increased from $6,000 to $6,500 for 2023. For taxpayers age 50 or over, the limit will rise to $7,500 after taking into consideration the unchanged $1,000 catch-up provision.

The tax-deductibility of these Traditional IRA contributions is, however, subject to income limits.

The pro-rated phase-out of the tax deductibility of your contributions if you file as Single and were eligible to contribute to an employer work retirement plan at any time during the year like a 401k/403b/SEP/SIMPLE/457 etc. (regardless of whether you actually contributed or not), now starts at $73,000 of MAGI and if your MAGI is greater than $83,000, then none of your contribution will be considered deductible and our advice is to not make a non-deductible contribution.

The pro-rated phase-out of the tax deductibility of your contributions if you file as Married Joint and were both eligible to contribute to company work plans at any time during the year, now starts at $116,000 of MAGI and if your combined MAGI exceeds $136,000, then none of your contribution will be considered deductible and our advice is to not make a non-deductible contribution.

The pro-rated phase-out of the tax deductibility of your contributions, if you file as Married Joint and you were not eligible to contribute to a company work plan, but your spouse was, now begins at a combined $218,000 MAGI and if your combined MAGI exceeds $228,000, then none of your contribution will be considered deductible and our advice is to not make a non-deductible contribution.

For Single filers who were not eligible to contribute to a company plan for the entirety of the previous calendar year or Married Joint filers where neither was eligible at any time in that year, then all contributions are fully tax deductible, regardless of income.

Important: if someone was ever eligible to contribute at any time during the year (even for just one pay period), then this deductibility is not available, even if no contributions were actually made.

3) ROTH IRAs

The overall annual contribution limit for individual retirement accounts (Traditional and Roth combined) has been increased from $6,000 to $6,500 for 2023. For taxpayers age 50 or over, the limit will rise to $7,500 after taking into consideration the unchanged $1,000 catch-up provision.

The ability to make contributions to Roth IRAs is, however, subject to income limits.

Contribution limits to Roth IRAs are unaffected by your eligibility to contribute to a workplace plan. They are based solely on your MAGI. Unlike Traditional IRAs, where you simply do not get a tax deduction beyond the phase-out limits but can theoretically still make a non-deductible contribution if you choose to (not a good idea though in our opinion), with a Roth IRA;you are absolutely prohibited from contributing anything at all if you earn beyond the MAGI upper phase-out limit and will be assessed penalties if you do so.

If you contribute to your Roth IRA during the year, but then later discover that you are ineligible to have done so based on what your income for that year ended up being, then you are able to withdraw this contribution (plus any earnings made on the contribution) before April of the following year as a “Removal of Excess Contribution” to avoid these penalties.

The pro-rated phase-out range for taxpayers making Roth IRA contributions is increased to a MAGI of $138,000 to $153,000 for Single filers and a combined MAGI of $218,000 to $228,000 for Joint filers. To be clear, if your MAGI exceeds either of those upper limits, you are prohibited from directly contributing anything to a Roth IRA that year (see my Back Door Roth IRA article).

There is no minimum or maximum age limit on who can open up and/or contribute to a Traditional or a Roth IRA, but remember that the annual contribution cannot exceed the earned income of the account owner that year – as disclosed on that account owner’s tax return. No earned income, no contribution permitted.

In the case of minors who may show some earned income, but a relatively low amount (from a summer job, perhaps) and for whom tax returns are filed, this would usually mean a Roth IRA is the best option, not a Traditional.

The $6,500 or $7,500 limits can be spread across both types of IRA if you wish. For example, if eligible for either and under 50 years old – you could, for example, contribute $2,000 to a Traditional IRA and $4,500 to a Roth IRA or $3,250 to both, just not more than $6,500 total to either or a combination of both.

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The material contained herein is informational only and at no time ever intended to constitute tax, legal or medical advice. It is also wholly insufficient to be exclusively relied upon as research or investment advice or as a sole basis for any investment decisions. The user assumes the entire risk of any actions taken based on the information provided in this or any other Anglia Advisors post.