Due to the high rate of inflation, the IRS said on Friday that it will increase the 2023 contribution limits for 401(k)s by a record $2,000, allowing workers to save more money in 2023.
Next year, individuals will be able to save up to $22,500 in their 401(k) accounts, a 9.8% rise from the current year’s cap of $20,500, according to an agency statement. The increased restriction also applies to other forms of defined contribution plans, such as 403(b), the majority of 457 plans, and the Thrift Savings Plan of the federal government.
It is the largest inflation adjustment since 2007 when 401(k) plans started indexing to inflation. Since plans began introducing cost-of-living adjustments 15 years ago, the IRS has typically increased the contribution limit by $500 year or maintained it at the same level.
The Internal Revenue Service routinely adjusts tax brackets and the Earned Income Tax Credit for inflation, but this year’s high inflation makes many of the changes more significant than usual. Americans are contending with the highest inflation rate in forty years, which is eroding their purchasing power because pay increases have lagged behind the rapid increase in prices.
The IRS announced higher tax brackets for 2023 on Tuesday, which could reduce tax bills for many workers in 2023. Higher contribution limits for retirement plans might also help millions of Americans reduce their tax burdens, as retirement savings are frequently done on a tax-deductible basis — that is, each dollar given to a 401(k) can be deducted from taxable income.
In 2023, the catch-up contribution for those over 50 who enroll in 401(k)s and similar programs will increase from $6,500 to $7,500, according to the Internal Revenue Service.
“Therefore, beginning in 2023, participants in 401(k), 403(b), the majority of 457 plans, and the federal government’s Thrift Savings Plan can contribute up to $30,000,” the IRS said in a statement.
New IRA limit for 2023: $6,500
The IRS announced that the contribution maximum for IRAs will increase to $6,500 in 2020, an 8.3% increase from the $6,000 limit in 2022.
However, the catch-up contribution for those above age 50 will continue at $1,000, as this provision is not subject to annual inflation adjustments, according to the agency.
In addition, the IRS said that it will increase the “phase-out” range for conventional IRA contribution deductions. If a taxpayer or their spouse is covered by a corporate retirement plan, such as a 401(k), and earns more than a particular amount, they may not be able to deduct IRA contributions from their taxable income.
The IRS announced that the phase-out range for single taxpayers with a workplace retirement plan will increase to between $73,000 and $83,000 in 2020, up from between $68,000 and $78,000 in 2022. Next year, single taxpayers with a 401(k) or similar plan will not be allowed to deduct IRA contributions from their taxable income if their income exceeds $83,000.
Additionally, the phase-out limits for various categories of taxpayers, including married couples filing jointly, have been expanded.