Do you know how much you and your employees can contribute to your retirement plans next year? In Notice 2022-55, the IRS recently announced cost-of-living adjustments that apply to the monetary limitations for pensions and other qualified retirement plans for 2023.
Because of inflation, these amounts have increased more in comparison to recent years.
In 2023, the contribution limit for employees who participate in 401(k) plans—along with 403(b) plans, most 457 plans, and the Thrift Savings Plan—will increase from $20,500 to $22,500.
For employees over the age of 50 who participate in the above-mentioned plans, the catch-up contribution limit will increase from $6,500 to $7,500. As a result, these individuals can contribute up to $30,000 in 2023.
SEP and defined contribution plans
In 2023, the contribution limit for defined contribution plans, including Simplified Employee Pension (SEP) plans, will increase from $61,000 to $66,000.
To participate in a SEP, eligible employees must receive at least $750 (increased from $650 in 2022) for the year.
In 2023, SIMPLE plan deferrals will increase from $14,000 to $15,500. For employees over the age of 50 who participate in SIMPLE plans, the catch-up contribution limit will increase from $3,000 to $3,500.
In 2023, the limit on annual individual IRA contributions will increase from $6,000 to $6,500. The IRA catch-up contribution limit for those over the age of 50 is not subject to a cost-of-living adjustment and will remain the same as in 2022: $1,000.
Additional plan changes
The IRS also announced the following changes for 2023:
- The annual benefit limitation under a defined benefit plan will increase from $245,000 to $265,000. Limitations for those who separated from service prior to January 1, 2023, will be calculated by multiplying their compensation limit (as adjusted through 2022) by 1.0833.
- Limitations concerning the definition of “key employee” in a top-heavy plan will increase from $200,00 to $215,000.
- For determining the maximum account balance in an employee stock ownership plan subject to a five-year distribution period, the dollar amount will increase from $1,230,000 to $1,330,000. For determining the lengthening of the five-year distribution plan, the dollar amount will increase from $245,000 to $265,000.
- The limitation for “highly compensated employees” will increase from $135,000 to $150,000.
Plan ahead with our financial advisors
Because contribution amounts will be significantly higher in 2023 than in previous years, you and your employees will be able to save more in your retirement plans.
If you have questions about your tax-advantaged retirement plan, or if you’re interested in exploring other retirement plan options, please contact our experienced tax services team.