The Internal Revenue Service is raising contribution limits for tax-deferred retirement plans by a record 9.8% for 2023 because of inflation.
Driving the news: Starting next year, Americans can contribute up to $22,500 into 401(k), 403(b) and most 457 plans — $2,000 more than the current $20,500 contribution limit, the IRS announced Friday.
- The jump is the largest increase ever in terms of dollars and percentage, according to benefits provider Milliman, The Wall Street Journal reports.
Why it matters: With the cost-of-living adjustments, Americans will be able to save more money for retirement, which in many cases will lower their income tax.
Meanwhile, the limit on annual contributions to an IRA increased to $6,500, up from $6,000.
- The IRA catch‑up contribution limit for individuals aged 50 and over is not subject to an annual cost‑of‑living adjustment and remains $1,000, the IRS said.
Between the lines: The income ranges for determining eligibility to make deductible contributions to traditional IRAs, to contribute to Roth IRAs and to claim the Saver’s Credit all increased for 2023, the IRS said.
IRS tax brackets updated for 2023
Separately, this week the IRS announced higher federal income tax brackets and standard deductions for next year.
- Cost of living adjustments like these, and recent ones for Social Security payments, are now crucial in an era of soaring inflation, Axios’ Emily Peck reports.
State of play: Inflation is hitting Americans hard right now. In September, consumer prices soared and were up 8.2% compared to a year before.
- By adjusting the tax brackets — as the IRS does every year — it is attempting to stop "bracket creep," which happens when inflation pushes taxpayers into a higher income tax bracket without an increase in real income, Axios' Herb Scribner reports.
FSA contribution limits up in 2023
Of note: The IRS also announced other inflation adjustments this week and said it is raising the limit for contributions to health flexible spending arrangements to $3,050, up from $2,850 for 2022.
Editor's note: This story was updated with additional information.
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