Retirement plan contributions are often fully or partially tax deductible, depending on the taxpayer’s circumstances. So, it’s natural to think about doing a retirement savings review at year-end and at tax filing time. With only six weeks left in 2022, taxpayers are looking to maximize their retirement saving opportunities before year-end and for 2023. Good timing, since the IRS recently announced the 2023 contribution dollar limits for IRAs and for employer retirement plans.
Individuals who earn taxable earned income, aka compensation, during the year are eligible to contribute to a retirement plan, such as a traditional or Roth Individual Retirement Account (IRA) or an employer-provided retirement plan, like a 401(k) or 403(b). The tax rules for figuring out the tax savings from retirement plan contributions are complicated, and they apply differently to different taxpayers, depending on their marginal tax bracket.
One set of tax rules that applies to all taxpayers is retirement plan contribution dollar limits. Every year, the IRS publishes the dollar contribution limit by retirement plan type. Some years there is no dollar adjustment, but there’s no way to know without checking. Here are the 2023 contribution limits for IRAs and many employers’ retirement plans:
Traditional and Roth IRAs
Total contributions made to all of a taxpayer’s traditional and Roth IRAs for 2023 can’t be more than total taxable compensation for the year, up to $6,500. The limit increases to $7,500 for taxpayers who are age 50 or older, to help those taxpayers who have a shorter time until retirement and need to “catch-up” on contributions to fund their future income needs. Traditional IRAs are tax deductible under certain circumstances related to employer-provided retirement plans and taxable income amounts. Roth IRA contributions are not currently tax deductible, but withdrawals made after age 59½ of monies held for five years or longer are not taxable.
Employer Retirement Plans
Employer-sponsored plans, like a 401(k) or a 403(b), are types of qualified profit sharing plan that allow employees to contribute a portion of their wages on a pre-tax basis to an individual account. The employee contribution limit increased to $22,500 for 2023, up from $20,500 for 2022. The employer may also contribute to employees’ accounts; however, employer contributions do not impact employee contribution limits.
Year-end and tax filing time are the perfect times to do a retirement savings review. With only six weeks left in 2022, there’s a lot of complicated rules to learn to determine the tax savings based on new retirement plan contribution dollar limits. Even more complicated, those rules apply differently to taxpayers with different income levels and for different retirement plan types. It’s all too much detail to include here. Good news – the IRS website has everything that you need to know about retirement plan options, contribution limits and tax savings at https://www.irs.gov/retirement-plans/plan-sponsor/types-of-retirement-plans.