Episode Summary:
In this episode, we talk about the 2023 IRS limits for various savings plans. We discuss the difference in benefits related to taxes and how to maximize these plans for long-term savings success. We hope this discussion motivates you to save more in 2023.
Episode Notes:
In October, the IRS announced that the contribution limits for several savings programs were increasing in 2023. This might not have made it onto your radar, but it’s a big deal and something you should be aware of. Federally regulating savings plans help you legally reduce your tax bill, and over time this can be a considerable amount of money.
Want to be a savings all-star in 2023? Start by maxing out the plans available to you. But let’s start with a quick refresher on tax-free and tax-deferred plans.
A tax-free program is one where you don’t pay income taxes when you withdraw. There’s a distinction though between forever tax-free like a Health Savings Account and a future tax–free Roth account where you’ve already paid income taxes on the contributions. We’ll get into that later.
A tax-deferred program means you contribute pre-tax to an account and thus reduce your taxable income. As an example, contribute $10,000, and you might save $2,500 in taxes. But when you withdraw it in retirement, you pay income taxes (hopefully lower taxes since you’re retired and have a lower income then).
2023 limits:
- 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased to $22,500, up from $20,500. Over 50: The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased to $7,500, up from $6,500.
- IRAs and Roth IRAs increased to $6,500, up from $6,000. The IRA catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost of living adjustment and remains $1,000. Remember Note that you can do both an IRA and a Roth, but the combined contributions can’t exceed the limit.
- Health Savings Accounts is $3,850 for self-only coverage, $7,750 for family coverage. Individuals 55 and over may contribute an extra $1,000 to their HSA.
What does this all mean, and what do you do?
- The main principle to understand is that you want to save on taxes when your tax rate will be highest and pay it when it is lowest. So if you are in your peak earnings, save taxes now. If you are just into the workforce, pay it now.
What should you do?
- If you want to really crush your savings goals in 2023, start by maxing out your employee plan, likely a 401k. $22,500 per person. You might need to do a little math to determine what % of your salary will contribute that amount.
- If you are eligible for a Roth IRA, max that out, but note that your income might disqualify you. $6,500 per person.
- If you can’t do a Roth, do a traditional IRA, but also note that you may not be able to deduct it. If you have an employee plan, your income may prohibit you from deducting the contribution. Also $6,500 per person.
- If you have a high deductible health insurance plan, which we recommend, max out your HSA.$3,850 per person.
That’s a lot of money and might seem out of reach, but the sooner you can max these out, the easier it will become to maintain it. Your lifestyle inflation will become based on these and you won’t need to make harder choices later.
Top 3 takeaways:
- Understanding pre-tax and post-tax savings plans is an important part of achieving your financial goals.
- Always strive to max out what the IRS allows.
- If you have aggressive financial goals in life, you’ll need aggressive savings habits, and it can start with these programs.
Show References: