The IRS released Notice 2022-55 on October 21, 2022, with an increase in contribution limits increasing for a 401(k), 403(b), most 457 plans, and Thrift Savings Plan (TSP) up to $22,500, and both a traditional and Roth IRA up to $6,500. There have also been increases to SIMPLE and SEP IRA, as well as defined benefit plans–or pension plans–contribution limits. In conjunction with changes to income tax brackets, the standard deduction, estate tax exemptions, capital gains rates, qualified business income (QBI) deduction, and long-term care deductions including per diem for 2023, inflation was a concern with cost‑of‑living adjustments.

401(k), 403(b), most 457 plans, Thrift Savings Plans, and Roth employee contribution limits

The contribution limits for 401(k), 403(b), most 457 plans, and Thrift Savings Plans (TSP) will increase in 2023 up to $22,500 per employee (an increase from up to $20,500 in 2022). If age 50 or older, the catch-up contribution limit will increase to $7,500 (an increase from up to $6,500 in 2022). Therefore, employees who are 50 and older can contribute up to $30,000 in 2023.

If an employee has both a 401(k) and 403(b), whether from a different or the same employer, the combined contribution limit is up to $22,500 in 2023 (plus an additional $7,500 catch-up contribution if age 50 or older). However, those with both a 401(k) and 457 can contribute the maximum amount to both plans separately for a grand total of $45,000 ($60,000 if age 50 or older). Similarly, employees with both a 403(b) plan and a 457 plan can contribute to each separately up to each retirement plan’s annual limit.

401(k), 403(b), most 457 plans, Thrift Savings Plans, and Roth total contribution limits

The total of both employee and employer contributions per employer will increase to $66,000 in 2023 ($6,500 in 2022). If age 50 or older, the catch-up contribution limit will increase to $7,500 ($6,500 in 2022). Employers who are 50 and older can contribute up to $73,500 in 2023.

As mentioned above, employer and employee contribution limits for both 401(k) and 403(b) is a maximum combined amount of $66,000 (or $73,500 with an additional $7,500 catch-up contribution if age 50 or older). But, the employer and employee contribution limits for both 401(k) and 457 or 403(b) plan and 457 is a maximum combined amount of $66,000 per retirement plan (plus an additional $7,500 catch-up contribution if age 50 or older). Essentially, the maximum contribution limit would be up to $132,000 (or $147,000 with an additional $7,500 catch-up contribution if age 50 or older).

“Mega Backdoor Roth”

Similar to the “backdoor Roth” IRA strategy, the “mega backdoor Roth” allows employees to make additional after-tax contributions which are then converted to a Roth IRA. In order for this option to work, the traditional 401(k) portion of $22,500 ($30,000 after age 50) has to be funded first and then the remaining difference of both employer and employee contribution limit up to $66,000 (or $73,500 after age 50) is the non-deductible amount that will be converted.

Another layer of complexity is that the employer plan will have to allow in-service distributions for this to work or an employee wouldn’t be able to transfer the money into a Roth IRA until they left their job.

For example, Sue is age 55, earns $100,000 per year, and wants to contribute as much of her annual salary to a “mega backdoor Roth.” In order for this strategy to work, she’ll have to first contribute $30,000 to her traditional 401(k) and the remaining $43,500 to the after-tax portion. If Sue’s employer allows in-service distributions, she can transfer the non-deductible $43,500 to a Roth IRA. If not, she’ll have to wait until retirement in order to transfer the remaining after-tax contribution.

SIMPLE and SEP IRA

The contribution limits for a Savings Incentive Match Plan for Employees Individual Retirement Account–or SIMPLE IRA–will increase in 2023 up to $15,500 ($14,000 in 2022). If age 50 or older, the catch-up contribution limit will increase to $3,500 ($3,000 in 2022).

With a Simplified Employee Pension–or SEP IRA–the maximum will go up to $66,000 in 2023 ($61,000 in 2022). Remember that elective salary deferrals and catch-up contributions are not allowed in SEP plans.

Traditional and Roth IRA

The contribution limits for both traditional and Roth IRAs will increase in 2023 up to $6,500 ($6,000 in 2022). As far as a catch-up contribution, there’s no difference from 2022 to 2023, and remains at $1,000 if age 50 or older.

Phase-out income range for a Traditional IRA

In order for traditional IRA contributions to be fully deductible, it has to be eligible depending on a person’s income range, even if covered by a retirement plan at work. Each year, a phase-out range is established that may reduce–or even eliminate–the deductibility of a contribution. The phase-out income range for a deductible traditional IRA in 2023 is as follows:

• Single individuals covered by a workplace retirement plan: $73,000 and $83,000 ($68,000 and $78,000 in 2022)
• Married couples filing jointly if the spouse making the contribution is covered by a workplace retirement plan: $116,000 and $136,000 ($109,000 and $129,000 in 2022)
• Individual contributing not covered by a workplace retirement plan and is married to someone who is covered: $218,000 and $228,000 ($204,000 and $214,000 in 2022)
• Married individual filing separately and is covered by a workplace retirement plan: No annual cost-of-living adjustment and remains between $0 and $10,000

Phase-out income range for a Roth IRA

In order to make Roth IRA contributions, depending on a person’s income range will deem them to be eligible or ineligible. The phase-out income range for a non-deductible (but tax-free after meeting the 5-year rule) Roth IRA in 2023 is as follows:

• Single individuals and head of household: $138,000 and $153,000 ($129,000 and $144,000 in 2022)
• Married couples filing jointly: $218,000 and $228,000 ($204,000 and $214,000 in 2022)
• Married individuals filing separately: No annual cost-of-living adjustment and remains between $0 and $10,000

“Backdoor Roth” IRA

Those ineligible to make a Roth IRA contribution, a “backdoor Roth” IRA may be another opportunity. For this strategy to work, a contribution to a non-deductible traditional IRA will have to be made first and immediately converted to a Roth afterward.

The important part is that no existing traditional IRA accounts exist or else the aggregation rule–or pro-rata rule–will not allow the choice of which funds can or can’t be converted.

For example, Kyle is age 59, earns $180,000, and wants to utilize the “backdoor Roth” IRA technique. He doesn’t have any other existing traditional IRAs and will be able to fund a non-deductible IRA up to $7,500. Kyle will immediately convert the non-deductible traditional IRA to a Roth IRA that will continue to grow tax-free. If he had an existing traditional IRA, the aggregation rules would apply and that particular contribution isn’t allowed to be segregated.

Defined benefit pension plan

The annual benefit under a defined benefit–or pension–plan will increase in 2023 up to $265,000 ($245,000 in 2022).