2023 IRA Contribution Changes
Financial
January 25, 2023
If you haven’t started saving for retirement, it is a great time to start. With inflation coming in at 8.2% over the past year, government agencies are making changes to accommodate the higher cost of living. The IRS has increased the annual IRA contribution limit to $6,500 for eligible individuals in 2023. Previously in 2022, the contribution limit was $6,000. The contribution limits apply to your combined Traditional IRA and Roth IRA. You can contribute to both throughout the year.
2022 and 2023 IRA Contribution Limits
| Type of Contribution | Details | 2022 | 2023 |
| Traditional or Roth IRA | Under the age of 50 | $6,000 | $6,500 |
| Traditional or Roth IRA | Age 50 or older | $7,000 | $7,500 |
| Simplified Employee Pension | SEP | $61,000 | $66,000 |
| Coverdell ESA | CESA | $2,000 | $2,000 |
| Health Savings Account | Self-only HDHP, under age 55 | $3,650 | $3,850 |
| Health Savings Account | Family HDHP, under age 55 | $7,300 | $7,750 |
| Health Savings Account | Self-only HDHP, 55 or older, includes $1,000 adjustment | $4,650 | $4,850 |
| Health Savings Account | Family HDHP, 55 or older, includes $1,000 adjustment | $8,300 | $8,750 |
Things to remember when reviewing your IRA contributions
Earned Income
When contributing to an IRA, it must be out of your earned income. This is money that you receive from your work or self-employment. The amount of earned money you make will decide how much you can contribute, especially if it is under the contribution amount. For example, if your job pays you $5,000, you can only invest $5,000 even though the 2023 IRA contribution limit is higher.
You may be asking yourself what isn’t earned income? Here are some examples:
- Social Security
- Retirement income
- Unemployment benefits
- Interest and dividends from investments
- Income from a rental property
- Child support
You need to know what your earned income is to make sure you are making the right contribution size to your IRA.
Spousal IRAs
If you or your spouse do not work but still want to have an IRA, the person that works or is self-employed can open a Spousal IRA. This way the contributions count as earned income and your stay-at-home spouse can save money for retirement as well. The spouse that works can contribute earned income to both as long as they have the money to cover the contribution level.
Modified Adjusted Gross Income
This number is your Adjusted Gross Income with exempted income and deductions. The IRS uses this number to determine if you qualify for some tax benefits. For example, this number decides how much you qualify to contribute to your Roth IRA with earned income.
Excess IRA Contributions
There may be an occasion where you contribute over the limit to your IRA. This may happen because you have multiple IRA accounts, your automatic payment is too high, or you make too much money for a full contribution allowance. In this situation, the IRS will tax you a 6% penalty tax on the excess contributions until it is corrected. If you realize that you have contributed too much in 2022, there are ways to fix it.
- Contact your plan administrator and ask for ways to fix it.
- Withdraw the excess contribution before the tax filing deadline in April.
- Pay the taxes on any earnings you made on the excess contribution.
In conclusion, it is time to start saving a little extra because the IRS has increased the contribution limits for 2023. Don’t forget that you can still contribute for 2022 until April 18, 2023. If you are ready to start contributing for 2023, that opened up on January 1, 2023, and will continue until April 15, 2024. Want to open and IRA? Head to VelocityCommunity.org and see what options we have available to you.
Sources: Investopedia, IRS
