Major Changes to 401(k), TSP, and IRA Contributions in 2023

In 2023, we’re going to see some of the largest changes to Retirement Account Contribution Limits we’ve ever seen. Not only will these contribution limits increase, but eligibility for higher income individuals to make IRA contributions or receive tax deductions on those contributions has also increased! This means you will be able to store away more of your pre-tax and post-tax dollars for retirement. Now these increase are due mostly to the unfortunately high rate of inflation we have been seeing, but hopefully this silver-lining can make the clouds feel at least just a little bit brighter.

401(k), TSP, and 403(b) Contribution Changes

Incase you don’t know, a 401(k) is an employee sponsored retirement account that offers tax advantaged growth. A Thrift Savings Plan (TSP) is the same thing as a 401(k), but it is only offered to Federal Employees and Military Service Members. Lastly, the 403(b) is also like a 401(k), except it is only offered to public school employees and other tax exempt organizations listed under section 501(c)(3) of the US Tax Code.

If you had been participating in one of these retirement accounts and were able to max it out, the maximum contribution limit was $20,500 per year in 2022. In 2023, the maximum contribution limit will increase to $22,500 per year for those under 50. That’s a $2,000 increase!

If you are over the age of 50, you are entitled to Catch-up Contributions. In 2022, Catch-Up Contributions were limited to an an additional $6,500, but in 2023, this will increase to an extra $7,500 bringing your total available contribution limit to $30,000 per year. That’s a $3,000 increase for those over 50!

IRA Contribution Changes

Individual Retirement Accounts (IRA) are personally managed Retirement Accounts which also offer tax advantages. In 2022, the maximum contribution limit was $6,000 per year. In 2023, the maximum contribution limit will increase to $6,500 per year. This a $500 increase! Unfortunately for those over 50, there was not an increase to IRA Catch-Up Contributions for 2023. They will remain at an extra $1,000 per year.

For 2023, the phase-out ranges will also increase. The Phase-Out Range is the income level where you can no longer contribute to the max IRA contributions or receive tax deductions, depending on the type of IRA you hold. These amounts differ based on whether you have a Traditional or Roth IRA and if you or your spouse also covered by a workplace retirement plan (i.e. a 401(k), TSP, 403(b), etc). The income amount is based on your Modified Adjusted Gross Income (MAGI), which for most people is typically the same as their Adjusted Gross Income (AGI). We’ll explain how these phase-out ranges work in a later post but for now, let’s get into the new ranges.

For Roth IRA Contributions, if you are single or a head of household, you are entitled to;

• Full Contributions if your MAGI is less than $138,000 (Increased from $129,000)

• Partial Contributions if your MAGI is between $138,000 and $153,000 (Increased from $129,000 to $144,000)

• No Contributions if your MAGI is over $153,000 (Increased from $144,000)

And if we continue with Roth IRA Contributions for those who are Married, Filing Jointly, you are entitled to;

• Full Contributions if your MAGI is less than $218,000 (Increased from $204,000)

• Partial Contributions if your MAGI is between $218,000 and $228,000 (Increased from $204,000 to $214,000)

• No Contributions if your MAGI is over $228,000 (Increased from $214,000)

For Traditional IRA Contributions you can always contribute regardless of your MAGI. However, if you or your spouse also contributes to a Workplace Retirement Plan (WRP), you may not be entitled to not be entitled to some or all tax deductions on your contributions based on the following phase-out ranges;

• Single and Contributing to a WRP: $73,000 to $83,000 (Increased from $68,000 to $78,000)

• Married, Filing Jointly, and IRA Contributor is covered by WRP: $116,000 to $136,000 (Increased from $109,000 to $129,000)

• Married, Filing Jointly, IRA Contributor is NOT covered by WRP but Spouse IS covered: $218,000 to $228,000 (Increased from $204,000 to $214,000)

Now if neither your or your spouse are covered by a WRP, you are entitled to the full deduction. These phase-outs only apply if you or your spouse are covered by a WRP.

The Wrap-Up

If you’re on the journey to FIRE or just trying to tuck away as much as you can for retirement, these numbers are critical to know. If you’re lucky enough or thrifty enough to be able to save the maximum contribution amounts every year, you may be able to boost your contribution amounts going into 2023. If you’re just starting off though and trying to figure out which accounts you should try to max out and in what order, you can read this post about the 5 Essential Financial Accounts and How Much to Contribute to Each. For the short version, experts typically recommend you;

• Contribute at least your Employer Match for 401(k), TSP, or 403(b)

• Then Max Out a Roth IRA if able (Now at $6,500 year)

• Then Max Out your 401(k), TSP, or 403(b) (Now at $22,500 per year)

However, it’s always a good idea to consult a certified tax or finance professional if you want more help on your specific financial path. What matters most is you keep educating yourself because Financial Literacy is the Number 1 Key to Financial Success!

*Disclosure* This is NOT financial advice and I am NOT a Certified Financial Planner. All information is provided for educational purposes only and is not to be construed as advice. Everyone’s financial situation is different and requires individualized planning. Seek out a Certified Financial Planner for assistance with your own financial situation.