The IRS recently announced how much savers are allowed to put into retirement accounts for the year 2023. When we refer to retirement accounts, that means 401(k)'s, 403B plans for no-profit workers, TSP for federal employees, IRS's, Roth IRAs, SEPs, and Simple Plans (and a couple more).
Now we have posted about the 5 uses of money recently, which again are the only five things you can do with money: Earn, Live, Give, Owe in tax, Owe in debt, and Grow. This article of course reflects Grow. But it also affects Owe in tax. Don't forget there are special characteristics and benefits to putting in retirement accounts. Namely, shifting taxable income to be taxed later instead of now (like a 401k or IRA contribution) or paying the tax now and being able to avoid the tax in the future (Roth 401k and Roth IRA). Knowing which tax bucket is best for you at a particular point in time is a whole other conversation.
After a year of high inflation, financial uncertainty, and as Jerome Powell put it "pain", some of the retirement contribution limits having been adjusted for inflation for the higher cost of living, have reached record levels.
Proving these new limits are for informational purposes only. As I post on this blog I'm not acting as your Financial Planner (which you should probably be working with a CERTIFIED FINANCIAL PLANNER TM), as a tax advisor, attorney, or anger-management therapist. Have a plan on how you're going to save in 2023, and work with a professional. I am a professional, so if you wish to give us a call I'll do my best to serve you well.
Individual Retirement Accounts (IRAs)
Traditional IRA contribution limits are up $500 in 2023 to $6,500. Catch-up contributions for those over age 50 remain at $1,000, bringing the total limit to $7,500.
Remember, once you reach age 72, you must begin taking required minimum distributions from a Traditional IRA in most circumstances. Withdrawals are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.
The income phase-out range for Roth IRA contributions increases to $138,000-$153,000 for single filers and heads of household, a $9,000 increase. For married couples filing jointly, phase-out will be $218,000 to $228,000, a $14,000 increase. Married individuals filing separately see their phase-out range remain at $0-10,000.
To qualify for the tax-free and penalty-free withdrawal of earnings, Roth 401(k) distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawal can also be taken under certain other circumstances, such as the owner's death.
Workplace Retirement Accounts
Those with 401(k), 403(b), 457 plans, and similar accounts will see a $2,000 increase for 2023, the limit rising to $22,500. Those aged 50 and older will now have the ability to contribute an extra $7,500, bringing their total limit to $30,000.
Once you reach age 72 you must begin taking required minimum distributions from your 401(k) or other defined-contribution plans in most circumstances. Withdrawals are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.
A $1,500 increase in limits for 2023 gives individuals contributing to this incentive match plan a $15,500 stop light.
Much like a traditional IRA, once you reach age 72, you must begin taking required minimum distributions from a SIMPLE account in most circumstances. Withdrawals are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.
As a reminder, this article is for informational purposes only. Consult with an accounting or tax professional before making any changes to your 2023 tax strategy.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.
The Internal Revenue Service recently announced its inflation adjustments to the standard deduction and federal income tax brackets for 2023. Knowing these numbers can allow you to make some smart tax-planning moves before the year's end. If you expect to be in a low bracket next year, you may want to try and delay some income to next year. On the other hand, if you expect to be in a high tax bracket in 2023, you may want to delay some tax deductions until next year.
New Standard Deduction For 2023
There is some good news for taxpayers regarding inflation; in 2023, the standard deductions will increase. For married couples filing jointly, the new standard deduction for 2023 will be $27,700. This is a jump of $1,800 from the 2022 standard deduction.
The 2023 standard deduction for single taxpayers and married filing separately will be $13,850. This is a jump of $900 from the 2022 standard deduction.
You may be wondering what is the standard deduction and what does it mean? The standard deduction is the number of tax deductions you can subtract from your income before you begin to owe taxes. For example, if you were a single filer and made $13,850 in 2023, you could take the standard deduction and not owe any federal income taxes. You may still owe payroll taxes and state taxes.
For taxpayers 65 or older, you can add $1,500 to your standard deduction for 2023 if you are married. This increases to $1,850 if you are unmarried or a surviving spouse (age 65 or older in 2023).
Changes To the Federal Tax Rates For 2023
The income that fits in each tax bracket for 2023 is the only change. Put more plainly; the federal marginal tax rates will remain the same in 2023. This is unless some new legislation was to change tax rates or brackets further. Each tax bracket has been adjusted for 2023 to account for inflation.
2023 Tax Brackets for Single Filers
37%: incomes higher than $578,125
35%: incomes over $231,250
32%: incomes over $182,100
24%: incomes over $95,375
22%: incomes over $44,725
12%: incomes over $11,000
10%: incomes of $11,000 or less
2023 Tax Brackets for Married Couples Filing Jointly
37%: incomes higher than $693,750
35%: incomes over $462,500
32%: incomes over $364,200
24%: incomes over $190,750
22%: incomes over $89,450
12%: incomes over $22,000
10%: incomes of $22,000 or less
The marriage penalty for federal income taxes doesn't kick in until you reach the 37% tax bracket. If you are itemizing your tax deductions, there are other limitations to tax breaks you can benefit from, as well as more examples of the marriage penalty in the tax code. For example, the $10,000 SALT cap is the same whether you are single or married.
The higher your income, the more valuable proactive tax planning guidance can be. As a Los Angeles Financial Advisor, California residents can face a combined state and federal income tax rate beyond 50% on income that falls into the highest tax brackets. The tax burden can be tough on business owners who must pay both sides of the Social Security payroll taxes . Work with your tax pro and Certified Financial Planner™ to ensure you optimize your retirement plans and minimize taxes along the way.
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