2022 was a year of inflation, stock market volatility, and rising interest rates. Rising costs have prompted IRS updates, which could affect investors’ retirement savings and taxes. Recent legislation may present further options for you in the new year.
Here are five key tax changes you should know about for 2023.
#1: Higher contribution limits for 401(k) and IRAs
There is good news if you’re interested in upping your retirement savings in 2023 – higher contribution limits!
The IRS has increased the amount employees can defer in 2023 to $22,500 for workplace plans, up from $20,500 in 2022. For savers 50 years and older, catch-up contributions have increased from $6,500 in 2022 to $7,500 in 2023, which means you can now sock away $30,000 into your 401(k) or your Roth 401(k) account. These increases apply to 403(b) plans, most 457 plans, and Thrift Savings Plans.
The contribution limits have also increased for IRAs, allowing you to save up to $6,500 for 2023, up from $6,000 in 2022. While the catch-up deposit remains at $1,000 for 2023, it will index to inflation starting in 2024.
#2: Inflation-adjusted tax brackets
The IRS also released higher federal tax brackets for 2023, which were adjusted to provide some relief from inflation. These higher tax brackets mean you can earn more before hitting the next tier of taxes, potentially paying less in taxes and keeping more of your hard-earned money.
If Roth conversions are part of your tax minimization and investment strategy, you could be able to convert thousands of more dollars into your Roth IRA in 2023 and stay in the same bracket.
The table below shows the income brackets for both single filers and married couples filing jointly for the 2023 tax year.
2023 Federal Tax Brackets
#3: Higher threshold for long-term capital gains
You may have encountered a long-term capital gains tax if you receive a 1099 form from an investment or brokerage account. This tax is triggered on “capital assets” like stocks, bonds, cryptocurrency, and real estate held for more than a year and sold for a profit.
Due to inflation, the IRS has bumped up the income thresholds on 0%, 15%, and 20% long-term capital gains brackets for 2023, like they did for federal income tax brackets.
Long-term capital gains tax rates for 2023
#4: Higher income limit for Roth IRA contributions
Roth IRAs can be a good place to save money for retirement if you would like to have tax-free withdrawals in retirement. I’ve written extensively on the benefits of Roth IRAs, as well as Roth IRA conversions.
This year, many investors will be able to save more money in a Roth IRA account due to the higher income limit for 2023. The modified adjusted gross income phaseout range rises to between $138,000 and $153,000 for single filers and $218,000 and $228,000 for married couples filing jointly, as shown in the table below.
Roth IRA contribution limits for 2023
#5: Delayed age for required minimum distributions
One of the changes in the recently passed bill known as “Secure 2.0” is a change to required minimum distributions (RMDs). RMDs are the minimum amounts a retirement plan account owner must withdraw annually once they reach a certain age.
Taking RMDs can be stressful for many people because they are forced to pay extra taxes, even when they don’t need that income. And if jumping tax brackets isn’t bad enough, that extra income can increase your social security tax. If you’re interested in reading about RMDs and strategies that could potentially lower taxes associated with your RMDs, click here.
Currently, retirement plan owners must start taking RMDs when they turn 72, with a deadline of April 1st of the following year for their first withdrawal and a Dec. 31st due date for future years.
However, the passing of Secure 2.0 delays the starting age for taking RMDs to 73 in 2023 and age 75 in 2033. If you’re younger and don’t need the RMDs, this opens up planning opportunities like Roth conversions, which you can read more about here.
If you’re wondering how these tax changes might affect your situation, talk to your financial adviser or schedule a consultation with me.
Getting started is easy with just three simple steps:
- Schedule your complimentary initial consultation
- Let us customize a plan designed to help minimize your potential tax bill
- Enjoy knowing that we’ll be in your corner every step of the way
Disclosure: One Life Financial Group provides a comprehensive tax minimization process and uses sophisticated software to help you uncover opportunities to minimize your tax bill. However, One Life does not process tax returns. Discuss all tax planning opportunities with your accountant before implementing tax planning strategies.
All written content is for information purposes only. Opinions expressed herein are solely those of One Life Financial Group Inc. and our editorial staff. Material presented is believed to be from reliable sources; however, we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your individual adviser prior to implementation. Advisory services are offered through One Life Financial Group, Inc., an Investment Advisor in the State of Minnesota.