Considering implementing some financial planning resolutions for 2023? Let’s review some of the contribution limit changes and action items you can take away to help plan for a secure retirement.
401(k) Contributions
What’s changed?
401(k) plans have an annual maximum contribution limit. This increased $2,000 to $22,500 for 2023. The 401(k) catch up increased $1,000 to $7,500.
Actions to consider:
- If you are maxing out your plan contributions, double check your deferral percentage. With the increased maximum contribution limit, you may need to increase your deferral percentage to continue to max out.
- If you max out your plan contributions and are older than 50, consider also contributing the maximum catch up amount.
- If you max out your plan contributions and turn 50 in 2023, catch up contributions are now available to you. Consider increasing your deferral to max out your contributions plus the allowable catch up.
- If you don’t max out your plan contributions, consider increasing your deferral percentage. Many financial planners recommend saving at least 10% - 15% of your annual salary. Make sure you are contributing at least enough to receive the maximum employer match.
IRA/Roth IRA Contributions
What’s changed?
IRAs and Roth IRAs have annual contribution limits. For 2023, the limit is the lessor of 100% of earned income or $6,500. This is a $500 increase. The IRA/Roth IRA catch up contribution stayed the same at $1,000.
Actions to consider:
- If your income and budget allows, plan to fully fund your IRA. Non-working spouses may fund accounts based on their spouse’s earned income.
- Keep an eye on phase-outs. If your income exceeds $73,000 (single) or $116,000 (married filing joint), your ability to deduct Traditional IRA contributions phases out. Roth IRAs have contribution limits, too ($138,000 single, $218,000 married filing joint).
- If you are over the Roth IRA contribution limits, you can still fund a Roth IRA using a technique called the “back door Roth.” This involves making a non-deductible IRA contribution and immediately converting it to a Roth.
- Keep in mind that you are allowed to fund an IRA if you are also contributing to a work-sponsored retirement plan.
RMDs
What’s changed?
For a long time, the age where RMDs (required minimum distributions) came into effect was 70 ½. The SECURE Act of 2019 moved that starting age to 72. With the passing of SECURE 2.0 in January 2023, that age has now increased to 73.
Actions to consider:
- If you turn 72 in 2023, you are no longer required to take a minimum distribution from your retirement accounts (until you turn 73 in 2024). If you don’t need the money, consider not taking a distribution from your retirement accounts unless it is a Roth conversion. Anyone currently subject to RMDs under the old 70 ½ or 72 RMD ages must continue to follow their existing RMD schedule.
- If you are under 73 in 2023, consider making a Roth conversion from your pre-tax retirement plan accounts. This increases your taxable income in the year of the conversion but reduces RMD amounts in future years. For many, it is helpful to complete Roth conversions prior to being subject to RMDs as RMDs plus Roth conversions in the same year may push your tax bracket higher than desired.
Gift Tax Exclusion, Estate Tax Exclusion, and GST Exemption Amount
What’s changed?
The gift tax exclusion, estate tax exclusion and GST exemption amount increased from $12,060,000 to $12,920,000 for 2023. The annual gift exclusion increased by $1,000 to $17,000.
Actions to consider:
- If your balance sheet is greater than $12,920,000 as a single person or $25,840,000 for a married couple, please visit your estate planning attorney to devise strategies to most effectively transfer your wealth.
- If gifting is part of your personal philosophy, you can gift $17,000 to any person tax free in 2023. You can gift to as many individual people as you would like. For grandparents wanting to help their grandchildren with education expenses, consider gifting a contribution to a 529 plan.
Other financial planning resolutions to consider:
- Make sure you have an emergency fund of 3-6 months’ worth of expenses. If you are an entrepreneur or your income is more variable, consider funding one year’s worth of expenses. Keep this money set aside in liquid, easy to access funds. Savings accounts, CDs, and money market funds are good options.
- Review your estate plan. Life changes may cause edits to be required to your plan. Read through your documents and make sure it still represents your wishes. If you don’t have an estate plan, make an appointment with an estate planning attorney to start the process.
- Review your portfolio and consider a rebalance. The market increased greatly in 2021 then decreased quite a bit in 2022. If you’ve not looked at the mix of your investments, they may be out of whack from your target allocation. Some accounts like 401ks will allow you to set your account to rebalance automatically. Consider this option for non-taxable accounts. You may want to be more careful in trading taxable accounts due to tax considerations.
If you’d like help reviewing your situation, Waukesha State Bank Wealth Management is here to help. Please contact us at (262) 522-7400 or wealthmanagement@waukeshabank.com to get started.
