With the new year in full swing, many individuals are looking for ways to maximize their retirement savings. To help you get the most out of your savings, let’s take a look at some of the updated contribution limits, Roth IRA contribution limits, and the back-door Roth contribution strategy that can help you reach your financial goals.

401(k), 403(b), 457, and SARSEPs Contribution Limits

The Internal Revenue Service (“IRS”) announced that elective deferrals to 401(k), 403(b), 457, and SARSEPs contribution limits will increase by $2,000 for 2023. This means that employees can now contribute up to $22,500 to their employer plan, which is a substantial increase from 2022's limit of $20,500. This limit applies to both traditional and Roth employer plans. However, those age 50 or older may be eligible to make an additional “catch-up” contribution of up to $7,500 in addition to the regular limit, a $1,000 increase from 2022.

Roth IRA Contribution Limits

The maximum annual contribution for a Roth IRA also increased for 2023—from $6,000 in 2022 to $6,500 in 2023—for individuals under the age of 50. Those who are over the age of 50 may be eligible for an additional “catch-up” contribution of up to $1,000 annually on top of the regular maximum limit.

It is important to note that contributions made into a Roth IRA are not tax deductible; however, withdrawals made during retirement will be tax free as long as certain requirements are met. The Roth IRA phaseout remains in effect for single taxpayers earning $138,000 - $153,000 and married filing jointly earning $218,000 - $228,000.

Back-Door Roth Contributions

If you exceed the Roth IRA phaseout income levels, it is not possible for you to contribute directly into a Roth IRA due to IRS regulations. However, there is a workaround called “back-door Roth contributions,” which allows those with high incomes to still reap the benefits of tax-free growth in a Roth IRA.  In order for this strategy to work properly, it is important that all steps are taken correctly and within IRS guidelines so that you do not incur any penalties from the IRS. It is highly recommended that you consult with your CPA or Financial Planner before attempting this strategy, as it does involve multiple steps and transactions and has specific deadlines associated with them as well.

Conclusion

When it comes down to it, finding ways to save more money into your retirement account can help ensure your financial future is secure when you decide to retire from the workforce one day. It's important that you take advantage of all available options when contributing towards your retirement, such as: taking advantage of employer matching contributions if your employer offers them or researching different types of tax advantaged accounts (e.g., Traditional IRAs and Roth IRAs, if applicable, depending on your current financial situation and resources available at hand).

Make an appointment for a free consultation to speak with the Provident Financial Planning team of Certified Financial Planner™ and CPA/JD tax experts, so we can advise you on how best to set up these accounts and start saving today!