The Internal Revenue Code (“Code”), in §415, establishes dollar limitations on benefits and contributions taxpayers may make to a qualified retirement plan. Code §415(d) requires the Treasury Secretary to annually update such limitations for cost-of-living increases. As the U.S. economy continues to face challenges associated with inflation and rising interest rates, the IRS released the 2023 cost-of-living adjustments, providing increased tax-deferred savings opportunities for taxpayers, related to qualified retirement plan contributions. Pursuant to IRS Notice 2022-55, the following cost of living adjustments will be implemented for calendar year 2023:
- The maximum amounts individuals may contribute to their Code §401(k), §403(b), and most other §457 plans increased by $2,000, to $22,500
- The limit on annual IRA contributions increased by $500, to $6,500
- The IRA catch-up limitation for taxpayers aged 50 or more years, remains at $1,000
- The catch-up contribution limit for taxpayers aged 50 or more years who actively contribute or participate in a Code §401(k), §403(b), or most other §457 defined plans increased for the first time since calendar year 2020, to $7,500, constituting a $1,000 increase. This means that such participants can contribute up to $30,000 to such plans, starting in 2023
- The catch-up contribution limit for taxpayers aged 50 or more years who participate in SIMPLE plans increased by $500, to $3,500
- Other taxpayers contributing to SIMPLE plans will see an increased contribution amount of $1,500, meaning they may contribute up to $15,500, starting in 2023
The Code also requires that several other retirement-related thresholds are subject to cost-of-living adjustments. Accordingly, taxpayers should be aware of the following:
- The adjusted gross income limitation for determining the retirement savings contributions credit for married taxpayers filing a joint return increased from $41,000 to $43,500
- The adjusted gross income limitation for determining the retirement savings contributions credit for taxpayers filing as head of household increased from $30,750 to $32,625
- The adjusted gross income limitation for determining the retirement savings contributions credit for all other taxpayers increased from $20,500 to $21,750
- The applicable dollar amount for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) increased from $109,000 to $116,000
- The applicable dollar amount for all other taxpayers who are active participants (other than married taxpayers filing separate returns) increased from $68,000 to $73,000
- If an individual or the individual’s spouse is an active participant, the applicable dollar amount for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remained at $0
- The applicable dollar amount for a taxpayer who is not an active participant but whose spouse is an active participant increased from $204,000 to $218,000
Further, the deduction for taxpayers making contributions to a traditional IRA is phased out for single individuals and heads of household who are active participants in a qualified plan and have adjusted gross incomes between $73,000 and $83,000, constituting an increase from between $68,000 and $78,000.
For married couples filing jointly, if the spouse who makes the IRA contribution is an active participant, the income phase-out range is between $116,000 and $136,000, constituting an increase from between $109,000 and $129,000.
For an IRA contributor who is not an active participant and is married to someone who is an active participant, the deduction is phased out if the couple’s income is between $218,000 and $228,000, constituting an increase from between $204,000 and $214,000.
For a married individual filing a separate return who is an active participant, the phase-out range is not subject to an annual cost-of-living adjustment and remains from $0 to $10,000.
The adjusted gross income limitation for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) increased from $204,000 to $218,000.
The adjusted gross income limitation for all other taxpayers (other than married taxpayers filing separate returns) increased from $129,000 to $138,000.
The applicable dollar amount for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0.
The adjusted gross income phase-out range for taxpayers making contributions to a Roth IRA is between $218,000 and $228,000 for married couples filing jointly, increased from between $204,000 and $214,000. For singles and heads of household, the income phase-out range is between $138,000 and $153,000, increased from between $129,000 and $144,000. For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
These cost-of-living adjustments present properly situated taxpayers with the opportunity to obtain the related tax benefits. Proper tax planning is important, and taxpayers are encouraged to coordinate with their professional tax advisors to ensure they are maximizing available benefits.
For more information or assistance regarding your tax planning, please reach out to request a consultation, call us at 216-696-1422.
