Jessica R. Ness, CFP® and Parker G. Trasborg, CFP® discuss inflation’s impact on 2023 retirement plan contribution limits.

Jessica Ness, CFP®
Jessica Ness, CFP®Senior Vice President, Financial Adviser, Principal
Parker G. Trasborg, CFP®
Parker G. Trasborg, CFP®Senior Financial Adviser

Jess: Hello, I’m Jessica Ness, Senior Vice President and one of the Partners at CJM and joining me today is Parker Trasborg, Senior Financial Adviser.  Thanks for being here.

Parker: Thank you, Jess.

Jess: 2022 has seen stubbornly high inflation with the consumer price index (CPI) rising at the fastest rate since the 1980s peaking at a 9.1% year over year increase this past June. Many of our client conversations this year have touched on inflation, and how it has impacted them at the grocery store and beyond. The higher inflation has lead the Federal Reserve to increase interest rates to try to slow it down which ultimately has caused both stock and bond markets to have a difficult year so far.  With all of the negative market news, Parker, is there is a positive from recent high inflation?

Parker: Yes, a little bit, Jess.  The positive is being able to save more in a tax-advantaged way, thus potentially saving more over time. Contribution limits to work retirement plans are tied to inflation and the IRS announced some big bumps to how much you are able to contribution to these plans in 2023.  As you can see here for 401(k)s, 403(b)s, most 457 plans and the Federal TSP plan, the limit is increasing from $20,500 in 2022 to $22,500 in 2023.  If you are 50 or older, the catch-up contribution is also increasing from $6,500 to $7,500.  This means that someone age 50 or older can save up to $30,000 in 2023 into their work retirement plan.

Jess: That is definitely a big jump and a good amount that the IRS lets you save each year.

Parker: It certainly is, there is one big thing to be aware of when updating your contributions.  Depending on your employer match, you may want to make sure that you have your contributions set-up to hit the maximum amount through the whole year rather than front-loading it early in the year.  For instance, if your work will match up to 4% of your contribution amount but you choose to contribute 15% and hit the maximum in August, you may miss out on 4 months of a potential match because you won’t have contributions going into the plan for September, October, November or December and thus nothing for your employer to match unless they offer what’s called a “true-up”.  So you are better off setting your contribution amount to a lower percentage to try to max out the plan in December to receive the full employer match throughout the year.

Jess: Great point, Parker, and something everyone should be aware of as they are setting up their contribution amount to avoid missing out on “free” money from your employer.  Similar to work plans, IRA and Roth IRA contributions are also increasing in 2023 from $6,000 to $6,500.  The catch-up contribution for those 50 and older is not tied to inflation and will remain at $1,000 for the year.

Parker: So a bump there as well, and the IRS has also bumped the income limits to be able to contribute to a Roth IRA for 2023.

Jess: Right, so if you were right on the edge this year and don’t find yourself receiving a pay bump equivalent to the inflation jump, you may be eligible to contribute to a Roth IRA in 2023.

Parker: Really great to be aware of and since the IRS allows you to contribute to an IRA up until April of the following year, you could wait until early 2024 to see where your income settles and decide to make a contribution at that time for 2023.

Jess: It’s nice that the IRS gives times to calculate your taxes before making a contribution, just don’t forget to do so. Now, there’s one other area that we wanted to hit on today that is seeing an inflation increase in the amount that you can contribute to next year.

Parker: Health Savings Accounts or HSAs.  For those eligible and are contributing to an HSA, the limits are going up to $3,850 for single and $7,750 for family coverage in 2023.  The catch-up contribution for those that are 55 and above will remain at $1,000.

Jess: Thanks Parker, these are all good tips and great ways to try to reduce your taxable income while also saving for the future.  If you have any specific questions or concerns, please reach out to your planner.  We are CJM Wealth Advisers and in a world of right now, we plan for what’s ahead.