When you’re saving for your retirement, it’s important to understand each of the options that are available to you.
Every type of retirement plan comes with its own unique set of pros and cons, so you should choose the one that best suits your personal investment style and your financial goals.
One of the most important factors to consider is how rapidly you can build your wealth using a retirement account.
The IRS caps annual contributions to self-directed IRAs and all forms of retirement accounts, otherwise known as annual contribution limits. This limit is set before each tax year, with some changes coming in 2023.
Learn about the 2023 annual IRA contribution limits so you can reach your retirement goals.
Traditional IRA Contribution Limits
Different age groups come with different annual IRA contribution limits. For the 2022 tax year, the IRS set the annual IRA contribution limit at $6,000 for investors under 50 years of age.
However, in 2023 this number will increase to $6,500 for the new tax year.
Meanwhile, investors who are 50 years old or older can contribute up to $7,500 to their IRA in 2023 (up from $6,500 the previous year).
These changes will allow retirees to save more for retirement and protect more of their assets from taxes.
Roth IRA Contribution Limits
There are multiple factors that determine how much money you can contribute to your Roth IRA.
First, you must consider your Modified Adjusted Gross Income, also referred to as MAGI. Additionally, you will need to consider your filing status. For instance, those who are married but file their taxes separately will have different contribution limits than those who are married and filing jointly.
If you are married and filing jointly, and your annual income is $228,000, you are not eligible for Roth IRA contributions. Meanwhile, if you are married and filing jointly with an income that falls between $218,000 and $227,999, you can make a partial contribution.
Investors who qualify and are under the age of 50 can make the full contribution of $6,500 in 2023.
Again, there are different limits for different filing statuses, each of which come with their own MAGI limits. Be sure to consult with a tax professional or your custodian to learn more about where you fall in the 2023 Roth IRA contribution limits.
401(k) Contribution Limits
401(k)s are popular among employers because contributions can be matched, and they are eligible for tax deductions at the end of each tax season.
For the 2023 tax year, the IRS has set the annual 401(k) contribution limit at $22,500. This number is also the same for Individual 401(k)s.
As is the case with many other types of retirement accounts, special provisions are made for investors who are 50 years old or older.
Investors who meet that age requirement are eligible to make an additional $7,500, known as “catch-up contributions.” Since the employer matches most 401(k) contributions, there are also total contribution limits.
You and your employer’s contributions cannot exceed $66,000 for the year. However, the IRS allows people 50 and up to contribute up to $73,500.
SEP IRA Contribution Limits
SEP IRAs are fully run by your employer, as they get to decide how much money they will contribute to your plan each year.
Nevertheless, it’s important to note that SEP IRAs come with their own set of contribution limits.
According to IRS guidelines, employers who set up a SEP IRA for their employees cannot exceed more than 25% of the employee’s annual compensation. In addition, the max contribution to a SEP IRA is $66,000.
It’s equally important to note that elective salary deferrals and catch-up contributions are not allowed in SEP IRAs.
SIMPLE IRA Contribution Limits
SIMPLE (Savings Incentive Match Plan for Employees) IRAs have lower contribution limits than traditional 401(k)s. However, these remain popular among investors because they allow employees to participate in multiple retirement plans.
For investors under the age of 50, the annual contribution limit of a SIMPLE IRA is $15,500. However, much like some of the other account types that we have discussed, special provisions are made for employees who are 50 or older, as they are allowed to invest up to $19,000 in their SIMPLE IRA.
Understanding your annual contribution limits for each type of retirement account will allow you to pick one that best meets your financial goals and complete successful retirement planning. If you have any questions about your retirement plan and your annual contribution limits, contact a specialist at Horizon Trust.
2023 Contribution Limits FAQs
Should You Max Out Your IRA Early in the Year?
The answer to this question depends on a variety of factors. Obviously, the most important one is whether or not you can afford to invest so much money into an IRA account at the beginning of the year. If doing so will cause you financial stress and leave you unable to pay other bills throughout the year, then no, you shouldn’t. However, if you have a surplus of money, it can be a good idea to max out your IRA contributions as early as possible. This allows your money to collect interest all year long.
How Much Should I Contribute to an IRA and How Frequently?
When you break down the 2023 IRA contribution limits on a monthly basis, it means that investors under the age of 50 can invest roughly $542 per month into their IRA. Meanwhile, investors who are 50 or older can invest approximately $625 per month.
Generally speaking, if you can afford to invest around $500 into your IRA, you will be doing very well. However, if you cannot afford to invest that much without neglecting your bills or yourself, most experts recommend that you try to set aside roughly 20% of your monthly income.