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The new year brings new goals, resolutions, and even the occasional inflation-adjusted retirement contribution limit. Ah, the things we look forward to! Like it or not, when you plan for your future, your annual 401(k) and IRA contributions are important pieces of achieving your retirement goals. When plans are put in place, your annual contribution limits don’t deviate much from year to year, but those changes are still important to be aware of when they do happen – and it’s your financial advisor’s job to keep you up to date on changes to contribution limits like the ones coming in 2023. When the calendar flips and forces our annual new muscle memorization, there are some important changes taking place – in this article, we will take a look at a few of them and examine a few best practices.

New Year, New (contribution limits)

Elective Deferrals such as 401(k), 403 (b) and 457 plans are jumping from a $20,500 contribution limit in 2022 to $22,500 next year in 2023 with a $1,000 jump in the catch-up contribution, moving from $6,500 to $7,500. IRA Contribution limits will move from $6,000 to $6,500 with the catch-up contribution remaining the same. Of course, with inflation up 7.7% this year, these adjustments are simply a sign of the times.

Best Practices

1 . Spousal IRA

If you’re maxing out your IRA, then you might be wondering what happens if you’re married and your spouse doesn’t work. Are they allowed to contribute to an IRA? Technically, no. But if a married couple files a joint tax return, then the working spouse is allowed to contribute up to the max for both their own IRA and their spouse’s IRA, on their behalf. Here’s what it could look like: A working husband maxes out his Roth IRA at $6,500, but the wife stopped working to stay home with the kids. The husband is permitted to contribute an additional $6,500 to the wife’s IRA on her behalf. It is important to be aware that you can max out an IRA to the extent that your earned income is at least equal to the amount of that contribution.

2. Catchup Contribution

If you’re 50 years old or older and still working, then you are allowed to make extra contributions to your retirement accounts to make up for lost time or to simply increase your retirement savings in short order. As mentioned above, that’s an additional $7,500 toward a qualified plan, and an extra $1,000 to an IRA in 2023. Those specifics are mentioned above.

3. Order of Operations

Our friends at Ramsey Solutions recommend contributing 15% of your earned income toward retirement each year. For employer-sponsored plans, we recommend contributing up to the match (if there is one), then funneling money into a Roth IRA, and then going back to your 401(k) to save the remainder, or into a brokerage (or “bridge”) account.

In 2023 each working member of a household can contribute $22,500 to a qualified plan, and $6,500 to an IRA. As Dave likes to say, “Match beats Roth beats Traditional.” The match comes first for a few reasons; if you are saving into the pre-tax side of your 401(k), any amount you contribute lowers your taxable income, taking advantage of the company match gives you free money, and if the account is fully vested, then you can take it with you if you ever leave the company by rolling it over into an IRA. Once you’ve reached the match, the Roth contributions allow you to experience tax-free gains over time since those are after-tax contributions. Be careful though – if your modified adjusted gross income exceeds $153,000 (2023) or $144,000 (2022) as a single person or $228,000 (2023) or $214,000 (2022) as a married couple filing jointly, you aren’t eligible to contribute to a Roth IRA. This leaves the traditional IRA as a nice option, though the growth of that money will be taxed upon withdrawal in retirement.

With so much to consider regarding your retirement, it’s important that you talk with a financial advisor who can help you navigate the nuances and make suitable recommendations for your retirement goals. I would be happy to help you with any questions you may have so please feel free to schedule a meeting with me today.


November 25, 2022

Nick Allen

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