How much can you and your staff put into your 401(k)s or other retirement plans for the upcoming year? The IRS has announced cost-of-living changes that increase most retirement plan contribution limits for 2023. Inflation caused the amounts to rise more than they did in prior years.
Employees who participate in 401(k) plans will be able to contribute up to $22,500 in 2023 (up from $20,500 in 2022). Additionally, this retirement plan contribution limit for 2023 is applicable to most 457 plans, 403(b) plans, and the Thrift Savings Plan of the federal government.
For employees 50 and older who participate in 401(k) plans and the other plans described above, the catch-up contribution limit will rise to $7,500 (up from $6,500 in 2022). Therefore, 50 and older members in 401(k) plans (and the other plans mentioned above) may make contributions of up to $30,000 in 2023.
Defined Contribution Plans and SEPs
For defined contribution plans, such as a Simplified Employee Pension (SEP) plan, the retirement plan contribution limit for 2023 will rise from $61,000 to $66,000. An eligible employee must be paid a minimum amount for the year in order to take part in a SEP. This sum will rise to $750 in 2023 from $650 in 2022.
The maximum amount that can be deferred to a SIMPLE plan in 2023 will rise to $15,500 from $14,000 in 2022. For employees 50 and older who participate in SIMPLE plans, the catch-up contribution cap will rise to $3,500 in 2023, up from $3,000.
Other Retirement Plan Contribution Limits for 2023
Additionally, the IRS announced other retirement plan contribution limits for 2023:
- A defined benefit plan’s annual benefit limitation will rise from $245,000 to $265,000 per year. For a participant who separated from service before January 1, 2023, the participant’s limitation under a defined benefit plan is computed by multiplying the participant’s compensation limitation, as adjusted through 2022, by 1.0833.
- The dollar limitation concerning the definition of “key employee” in a top-heavy plan will increase from $200,000 to $215,000.
- The dollar amount for determining the maximum account balance in an employee stock ownership plan subject to a five-year distribution period will increase from $1,230,000 to $1,330,000, while the dollar amount used to determine the lengthening of the five-year distribution period will increase from $245,000 to $265,000.
- The threshold for what constitutes a “highly compensated employee” will rise from $135,000 to $150,000.
Contributions to IRAs
The yearly retirement plan contribution limit for 2023 for an individual IRA will increase to $6,500 from $6,000 in 2022. The $1,000 maximum IRA catch-up contribution limit for people 50 and older is not subject to an annual cost-of-living increase.
You and your employees will be able to contribute significantly more to your retirement plans in 2023 because of the present high inflation rates. Next year, the donation amounts will be far higher than they were this year. If you want to learn more about other retirement plan options or if you have questions about your tax-advantaged retirement plan, get in touch with us.