5 taxes, funding adjustments that would enhance your funds in 2023
1. Higher contribution limits on retirement accounts
If you’re looking to top up your retirement savings, there’s good news for 2023: higher contribution limits for your 401(k) and individual retirement accounts.
In 2023, the deferral limit for employees is $22,500, up from $20,500, and catch-up deposits for savers aged 50 and older will increase from $6,500 to $7,500. These increases also apply to 403(b) plans, most 457 plans, and savings plans.
“This is a big shift for a lot of people,” said Certified Financial Planner Brandon Opre, founder of TrustTree Financial in Huntersville, North Carolina.
But without a reminder from an advisor or your 401(k) plan provider, those increases “could go undetected,” he said.
Contribution limits for IRAs have also been increased, 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 be adjusted for inflation beginning in 2024.
2. Tax savings with inflation-adjusted brackets
Scott Bishop, CFP and executive director of wealth solutions at Houston-based Avidian Wealth Solutions, said some of the biggest changes in personal finance for 2023 are related to inflation.
For example, in October the IRS announced “some relief” with higher federal income tax brackets for 2023, he said, meaning you can earn more before hitting the next tier.
Each bracket shows how much you will owe in federal income taxes for each portion of your “taxable income,” calculated by subtracting the larger of the standard or individual deductions from your adjusted gross income.
The standard deduction also increases in 2023, rising to $27,700 for married couples filing together, up from $25,900 in 2022. Single parents can claim $13,850 in 2023, a jump from $12,950.
3. Higher threshold for 0% long-term capital gains
If you plan to sell investments from a taxable portfolio in 2023, you’re less likely to trigger a long-term capital gains tax bill, experts say.
Based on inflation, the IRS has also raised long-term capital gains income thresholds of 0%, 15%, and 20% for 2023, which apply to viable assets owned for more than one year.
“It’s going to be pretty significant,” Tommy Lucas, a CFP and registered agent at Moisand Fitzgerald Tamayo in Orlando, Fla., recently told CNBC.
With higher standard deductions and income thresholds for long-term capital gains in 2023, you’re more likely to fall into the 0 percent bracket, Lucas said.
For 2023, you may qualify for the 0% tax rate with taxable income of $44,625 or less for single individuals and $89,250 or less for married couples filing together.
4. Higher income limit for Roth IRA contributions
Inflation adjustments for 2023 also mean more investors could qualify for Roth IRA contributions, experts say.
“We talk a lot about Roth conversions,” said Lawrence Pon, a CFP and CPA at Pon & Associates in Redwood City, Calif., referring to a strategy that converts pre-tax IRA funds into a Roth IRA for future tax-free growth converts.
“But how about Roth? [IRA] Contributions?” he said at the Financial Planning Association’s annual conference in December, pointing to higher income limits for 2023.
More Americans could be eligible in 2023 as the adjusted gross income exit range widens to $138,000-$153,000 for single parents and $218,000-$228,000 for joint-filing couples.
While some investors look for “complicated” steps, such as For example, in so-called backdoor Roth conversions, where post-tax 401(k) contributions are transferred to a Roth IRA, Pon urges investors to first verify the eligibility of Roth IRA contributions.
5. More time for required minimum distributions
On December 23, Congress passed a $1.7 trillion budget appropriations bill, including dozens of retirement plans known as “Secure 2.0.”
One of the provisions for 2023 is a change in the required minimum distributions, or RMDs, that must be withdrawn from certain retirement accounts annually.
Currently, RMDs begin when you turn 72, with a deadline of April 1 of the following year for your first payout and a December 31 due date for future years. However, Secure 2.0 shifts the entry age to 73 years in 2023 and 75 years in 2033.
“Those who are already taking RMDs will not be affected, even if you just turned 72,” said Nicholas Bunio, a CFP at Retirement Wealth Advisors in Berwyn, Pennsylvania.
But the change may offer some “great planning opportunities” if you’re younger and don’t need the RMDs, like possible Roth conversions, he said.