Knowing your 2023 IRS retirement plan limits is an important component of financial planning. While retirement planning can seem complex, especially with ever-changing legislation, there are important facts and figures that can help you maximize your retirement income.
Health costs continue to rise, and many feel uncertainty surrounding Social Security and the Federal Medicare budget. Nevertheless, having a plan can help you better understand how much you can contribute, when you can take money out, and the taxes you will incur when doing so.
Although there are federal laws and regulations for retirement plans, there are also many different types of savings plans. To learn more about the details of your employer’s plan, ask your human resources specialist for a copy of the Summary Plan Description. Let’s explore some of your possible options and the 2023 IRS retirement contribution limits which apply.
Disclaimer: While we pride ourselves on being your #1 Medicare expert and source of life insurance, this article is merely for research only and is not financial advice. Any decisions or information gained from this content should be run by your licensed financial professional before any changes or decisions are made.
Defined Benefit Plan
Defined benefit plans are fixed, pre-established benefits for employees when they retire. Employers will contribute each year. This method is complex and more costly to create and maintain. Overall, while employees are sometimes required to make contributions, and voluntary contributions are allowed in certain situations, your employer is the primary contributor. You can’t take in-service distributions as a participating parting before you are 59 years and 6 months of age.
Typically, your defined benefit plan contribution limits won’t exceed either the lesser of 100% of your average compensation within your highest 3 consecutive calendar years or $265,000 in 2023. Note, these figures can change based on the cost of living that year.
Defined Contribution Plan
Defined contribution (DC) plans consist of individual accounts for each employee participating. As a participant, you make contributions to your plan, which is invested into a fund or multiple funds offered by your plan. Once you retire, the benefit’s value equals the amount of money you’ve contributed plus the performance of the investments. Though the amount can change over time, $22,500 is the 2023 IRS retirement plan limit in place for 401(k) contributors.
DC plans usually have their taxes deferred using a 401(k) or a 403(b), which are contributed to by you as an employee. The funding comes from a percentage of your paycheck and is used for your retirement. In some cases, your company may match some of your contributions.
When using a defined contribution plan, there are restrictions in place dictating the penalties employees face when withdrawing from the fund. You can invest pre-tax dollars and grow your nest egg tax-deferred until you retire. Participating in a DC plan is voluntary and you can choose your investments should you choose. An increase in value is not guaranteed.
Defined Benefit Plans vs. Defined Contribution Plans
Employer-sponsored retirement plans can be defined contribution plans or defined benefit plans, and each has its own features and benefits that will affect your retirement planning.
Defined benefit plans do not involve separate accounts for participants. Instead, these types of plans promise a specific amount at retirement. But defined contribution plans have increased in popularity in the past few decades. DC plans have become many times more common than defined benefit plans as 401(k)s and the like consisting of various sources of funds contributed by the employee or employer. The specific design of your company’s program determines these sources.
A defined contribution plan might allow for standard, pre-tax employee contributions or offer a Roth deferral option. Roth refers to after-tax contributions, and because you pay taxes on the money before investing it in your Roth retirement plan, you do not pay taxes when the funds come back to you.
An example of an employer contribution source would be matching contributions. Matching contributions mean that the employer matches your contribution up to a certain percentage of your salary. It is a good rule of thumb to contribute at least the amount that your employer matches when possible.
401K 2023 Contribution Limit IRS Catch-Up Details
A 401k catch-up contribution is an elective deferral using money that you contribute to your defined contribution plan as a dollar amount or percentage of your salary from each paycheck. It is available to employees ages 50 and older and can be used to defer taxes and increase your retirement portfolio.
But the amount you and your employer can contribute together is also limited. According to Forbes, $73,500 is the 401K 2023 contribution limit IRS catch-up maximum. These contributions are allowed in 401(k) (not SIMPLE), 403(b), SARSEP, or governmental 457(b) plans.
Required Minimum Distribution Age
If you turn 72 and have funds in an employer retirement plan, you must adhere to the Required Minimum Distribution (RMD). Meaning you need to start taking funds out. Your Required Minimum Distribution refers to the least amount you must start withdrawing from your plan annually.
You can withdraw more than this amount if you wish, and the amount is determined based on your age and account balance. Furthermore, if your spouse is more than ten years younger than you and is your sole beneficiary, their age is also a factor.
It is important to remember to take your RMD each year in its entirety to avoid having to pay a 50% excise tax. You must take your first RMD by April 1 of the year you turn 72. This is known as your Required Beginning Date.
If you’re looking to understand how much your required minimum distribution is in 2023, the U.S. Securities and Exchange Commission (SEC) offers a calculator. But please note, as of this writing, the tool had only been updated for 2022. Therefore, your results and figures may differ until there is another update.
Early Retirement Withdrawal Penalty
If you withdraw funds from your retirement account before the age of 59 ½, you’ll need to pay gross income plus 10 percent in the form of an early retirement withdrawal penalty. There are, however, a few exceptions exist for this tax, including:
- Disability of the participant
- Certain unreimbursed medical expenses
- Military reservist requesting a qualified distribution after a calling for active duty
If the employee separates from service after they turn 55, they are also not subject to the early distribution tax. Understanding these penalties is important for retirement planning, as withdrawing earlier can affect your income in the future.
Normal Retirement Age
The Normal full retirement age or Normal Retirement Date is established by the plan documents for a defined contribution plan. In 2023, this age is defined as 67 years of age, a push upwards from what had previously been the norm of 65 years old.
Sixty-five is still most often the participant’s age at which the value for defined benefit plans is calculated. But when the participant reaches their plan’s Normal Retirement Age or Normal Retirement Date, they can opt to receive their benefit in full. In the case of defined benefit plans, the benefit is received in installments.
As Roth deferrals are taxed when they are contributed to the account, no tax is deducted from the retirement benefit taken from a Roth account.
Funeral Expenses to Think About While Planning Retirement
Considering the cost of a funeral these days can reach $10,000 on average, you’ll want to set up final arrangements when you are making your retirement plan. While this is for your loved ones more than it’s for you, it’s still important to help them avoid dealing with financial hardship during an already difficult time.
When setting up your loved ones, you will want to consider your life insurance, assets, and power of attorney. Since Medicare does not consider a funeral a medical expense, you will need to make sure your family can cover the cost. Fortunately, we here at MedicareFAQ are equipped with many different solutions, including life insurance, to help you manage expenses in your golden years.
Retirement Planning in 2023
Often, we enroll in the retirement plan that our employer offers as soon as possible. We seldom reevaluate how much we are contributing to the plan throughout the years. Yet, if you wish to retire in the not-too-distant future, it is vital to stay aware of the latest updates in retirement planning.
Having a retirement checklist will help ensure your financial security in retirement. It is beneficial to be aware of the current limits for retirement plans for those between the ages of 59 ½ and 72 to avoid a shock over additional taxes.
Retirement plans can vary, and it’s important that you are familiar with the specifications of your retirement plan. Be sure to review your plan documents, understand the 2023 IRS retirement plan limits, and devise a plan with your licensed financial team of professionals to ensure you stay gold throughout your golden years.