If you want tax breaks for saving for retirement, individual retirement accounts are a great place to start. With the combination of an upfront deduction for contributions for many taxpayers and the ability to defer tax on income and gains until you make withdrawals, IRAs play a key role in the tax planning for millions of Americans.
Contribution limits for IRAs don't go up very often, but when they do, it's newsworthy. The Internal Revenue Service just released what the 2023 traditional IRA contribution limits are going to be, and the boost will be good news for those who like to max out their retirement savings year in and year out. Moreover, certain taxpayers will be able to earn a little more income before the tax benefits of traditional IRA contributions start to disappear.
Why the 2023 traditional IRA contribution limits went up
The IRS revealed that traditional IRA contribution limits will be going up in 2023. Those who will be younger than 50 throughout 2023 will see their limit go up $500 to a total of $6,500. Those 50 or older by year-end in 2023 will get an additional $1,000 catch-up contribution, resulting in a new limit of $7,500 -- also up $500 from 2022's number.
Image source: Getty Images.
The reason for the increase is that limits on traditional IRA contributions are one of the many provisions of the tax laws that are indexed for inflation. Specifically, the law directs the IRS to use procedures similar to the ones that the Social Security Administration uses to determine its annual cost-of-living adjustment (COLA) for Social Security benefits. With the Social Security COLA coming in at 8.7% for 2023, it makes sense to see the IRA limits going up by as much as 8%, as well.
Watch out for income limits
Anyone who has earned income can contribute to a traditional IRA. However, if a workplace retirement plan, like a 401(k), is available to you or your spouse, you might not be able to deduct some or any of your traditional IRA contributions on your tax return.
For those who have retirement plan coverage at work, the income limits in 2023 will be as follows:
|
For This Filing Status: |
Deductions Are Reduced If Income Is Above This Amount |
Deductions Are Not Available If Income Exceeds This Amount |
|---|---|---|
|
Single, head of household, or married filing separately IF you didn't live with your spouse during the year |
$73,000 |
$83,000 |
|
Married filing jointly or qualifying widow or widower |
$116,000 |
$136,000 |
|
Married filing separately IF you lived with your spouse at any point during the year |
$0 |
$10,000 |
Data source: IRS.
The numbers for everyone but married people filing separately are up considerably from 2022 levels. Most single filers will see a $5,000 boost to the income threshold limits, while joint filers and qualifying surviving spouses will get a $7,000 jump.
If you don't have coverage at work but your spouse does, then higher limits apply:
|
For This Filing Status: |
Deductions Are Reduced If Income Is Above This Amount |
Deductions Are Not Available If Income Exceeds This Amount |
|---|---|---|
|
Married filing jointly |
$218,000 |
$228,000 |
|
Married filing separately IF you lived with your spouse at any point during the year |
$0 |
$10,000 |
Data source: IRS.
The numbers in the first row above are $14,000 higher than they were in 2022.
How much can you deduct?
The income limits define how much, if any, of your contributions you'll be allowed to deduct on your tax return. If you're near the lower limit, you can still deduct most of what you put in your traditional IRA. If you're near the upper limit, though, then your deduction will be severely curtailed.
An example can help illustrate this. Say you're married filing jointly and both you and your spouse will be 50 or older in 2023 and have access to a 401(k) plan at work. Your adjusted gross income is $126,000, and you intend to contribute the full $7,500 to your traditional IRA.
In that case, because $126,000 is halfway between the thresholds, you'll qualify to deduct half of your $7,500 contributions, or $3,750. If your adjusted gross income were $136,000, however, you wouldn't be able to deduct any of the $7,500.
Should you contribute anyway?
Again, it's important to understand that you can still make a traditional IRA contribution, even if it's not deductible. If you make a nondeductible contribution, you won't get double-taxed on that amount. Rather, the IRS will take it into account as you withdraw money from your retirement accounts and not treat that portion as taxable income.
These limits don't go into effect until 2023, so you'll have to wait until January to take advantage of them. Even after the beginning of the year, you'll also want to be careful to specify whether you're making a 2022 or 2023 tax year contribution -- particularly if you haven't made any 2022 contributions yet.
Traditional IRAs are one of the most commonly used tax breaks available. Getting a little extra money into your retirement account could be the smartest move you'll ever make.
