What do the 2023 cost-of-living adjustment numbers mean for you? Part three: retirement plans

2023 cost of living adjustment amounts

For more than 60 tax provisions, the IRS recently released its cost-of-living adjustment numbers for 2023. Many values increased significantly over 2022 estimates due to the significant increase in inflation this year. Be sure to take these 2023 modifications into account when you put 2022 year-end tax preparation techniques into action.

Remember that the calculations for annual inflation adjustments use the chained consumer price index (C-CPI-U) under the Tax Cuts and Jobs Act (TCJA). This calculation increases tax-bracket thresholds, the standard deduction, certain exemptions, and other figures at a slower rate than when the consumer price index was in use. This potentially pushes taxpayers into higher tax brackets and making various breaks worth less over time. The TCJA permanently adopts the C-CPI-U.

2023 cost-of-living adjustment numbers for retirement plans

For 2023, nearly all limits on retirement plans will increase. Thus, if you’ve already been contributing the maximum amount permitted under your plan, you may only have a few options to raise your retirement savings:

Your ability to benefit from IRAs may be lowered or eliminated due to your modified adjusted gross income (MAGI). IRA-related MAGI phaseout range limits will all rise for 2023, which is fortunate. Here are the limit increases:

 Type of limitation2022 limit 2023 limit
Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans$  20,500$  22,500
Annual benefit limit for defined benefit plans$245,000$265,000
Contributions to defined contribution plans$  61,000$  66,000
Contributions to SIMPLEs$  14,000$  15,500
Contributions to IRAs$    6,000$    6,500
“Catch-up” contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans for those age 50 and older$    6,500$    7,500
Catch-up contributions to SIMPLEs$    3,000$    3,500
Catch-up contributions to IRAs$    1,000$    1,000
Compensation for benefit purposes for qualified plans and SEPs$305,000$330,000
Minimum compensation for SEP coverage$       650$       750
Highly compensated employee threshold$135,000$150,000

Traditional IRAs

Suppose a taxpayer (or their spouse) participates in an employer-sponsored retirement plan. In that case, the following MAGI phaseout ranges apply to the deductibility of contributions:

  • For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether they are a participant in an employer-sponsored plan:
    • For a spouse who participates, the 2023 phaseout range limits will increase by $7,000, to $116,000–$136,000.
    • For a spouse who doesn’t participate, the 2023 phaseout range limits will increase by $14,000, to $218,000–$228,000.
  • For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2023 phaseout range limits will increase by $5,000, to $73,000–$83,000.

So, taxpayers whose MAGIs are within the allowable range may deduct a portion of their IRA contributions. Taxpayers whose MAGIs are above that range may not do so.

The exception is that taxpayers who have their deductions decreased or removed can still contribute to a regular IRA. The $6,500 contribution cap for 2023 is still in effect (plus a $1,000 catch-up, if applicable, and less any Roth IRA contributions). Suppose your MAGI is also too high for you to contribute (or ultimately contribute) to a Roth IRA. In that case, making nondeductible traditional IRA contributions can be advantageous.

Roth IRAs

Your capacity to contribute to a Roth IRA is unaffected by whether you participate in an employer-sponsored plan. However, MAGI limits may limit or even prevent your ability to contribute:

  • For married taxpayers filing jointly, the 2023 phaseout range limits will increase by $14,000, to $218,000–$228,000.
  • For single and head-of-household taxpayers, the 2023 phaseout range limits will increase by $9,000 to $138,000–$153,000.

If your MAGI is within the range that applies, you may contribute in part, but if it is higher than the top of the range, you may not contribute at all.

Note: The phaseout ranges for both regular and Roth IRAs are substantially lower for married taxpayers filing separately.

How the 2023 cost-of-living adjustment affects you

Understanding how the 2023 cost-of-living adjustment amounts may affect your tax and financial circumstances is critical because they are much greater than the 2022 amounts. We’d be happy to assist with the math calculations and further explain the best tax-saving techniques based on the 2023 data. Contact our RRBB accountants and advisors today for more information.

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