Taxpayers are able to take advantage of increased contributions limits in 2023. As part of its changes to a group of cost-of-living adjustments, which includes increases in social security and income tax bracket changes, the federal government announced that individual employee contribution limits will increase to $22,500 from the $20,500 in 2022. Defined plan provisions for employees have also increased with a total annual limit of $66,000 in 2023 from $61,000 in 2022. For individual retirement accounts, or IRAs, the limit increases to $6,500 from $6,000.
These retirement contributions are a way for taxpayers to save for the future and, at the same time, be able to get a benefit during the current tax year. The reason is these retirement contributions are generally considered to be made with pre-tax money. This means that the taxpayer is forgoing the earnings in the current tax year, and tax policy encourages saving for later and for retirement by then allowing that taxpayer’s taxable income to decrease. Most employees will notice in their issued W-2s from their employers that their taxable earnings are less by the amount of retirement contributions that are made with pre-tax income. As this helps to decrease the taxable income, it can lead to a lower tax liability or a greater refund. There are income limits for plans, such as IRAs, if the amount can be considered deductible in the current year, but for most taxpayers, these retirement plans help to decrease the bottom line for taxes.
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