Next year, you can put more money away for retirement and get a tax break

By CNN Newsource

Published November 2, 2023 10:40 AM

By Jeanne Sahadi, CNN

New York (CNN) — For those who are able or wish to, you will be allowed to sock away even more money into a 401(k) or IRA next year.

The IRS this week announced it was raising the 401(k) contribution limit to $23,000, up from $22,500 currently.

For anyone 50 or older, you will be allowed to put away an additional $7,500 in “catch-up contributions,” for a total of $30,500.

Those same limits apply to 403(b) plans, most 457 plans and the federal government’s Thrift Savings Plan.

Most typically, the portion of your income that you contribute to your 401(k) is tax-deferred. That means those contributions won’t be subject to income tax in the year you make them. Those contributions can be allowed to grow over the years through your investments, but when you retire, the withdrawals you take from your 401(k) will be subject to income tax.

If, however, your employer offers — and you elect to contribute to — a Roth 401(k) in your workplace savings plan, the money you contribute will be subject to income tax the same year you make the contribution, but then it can grow from there and you can withdraw it in retirement tax free.

IRA limits get a boost too

The IRS also announced it was raising the IRA annual contribution limit to $7,000 next year, from $6,500 this year. For people 50 and older, you may contribute an additional $1,000 on top of that, for a total of $7,500.

If you contribute to a traditional IRA, you won’t owe income tax on your contributions the year you make them. Then when you start taking money from your IRA in retirement or before retirement, your withdrawals will be subject to income tax.

If you contribute to a Roth IRA, you will pay income tax on your contributions the year you make them, but any money you withdraw from the account in retirement — or in certain situations, before retirement — will be tax free.

Not everyone, however, is eligible to get a tax break when they contribute to a traditional IRA or a Roth IRA.

The rules are a little confusing (translation: crazy-making — see here). But, for instance, if you are single, make more than $87,000 next year (up from $83,000 this year) and have access to a workplace savings plan, you will not be able to get a tax break for your contributions to a traditional IRA.

If you’re married and the spouse who is making an IRA contribution has access to a savings plan at work, then you also will not get a tax break for those contributions if, as a couple, you earn more than $143,000 (up from $136,000 this year). Those cut-off limits rise to $240,000 (up from $228,000 today) if the spouse making the IRA contribution does not have access to a workplace plan but the other spouse does.

When it comes to Roth IRAs, you may not contribute to one next year if you make more than $161,000 for singles (up from $153,000 currently) and $240,000 (up from $228,000) for married couples filing jointly.

See if you qualify for a Saver’s Credit

The Retirement Savings Contributions Credit (aka Saver’s Credit) is intended to help moderate- and low- income workers put more away for retirement.

If your income is low enough and you contribute money to a retirement plan, you can reduce your federal income tax liability by up to $2,000, based on a percentage of your contributions.

To qualify next year, if you’re single, your income must fall below $38,250 (up from $36,500 currently). If you’re a head of household you must make less than $57,375 (up from $54,750). And if you’re married filing jointly, your joint income must be below $76,500 (up from $73,000).