As we all know, 2022 was a year of market volatility, rising interest rates, and sky-high inflation. So it’s no surprise that many Americans feel uneasy heading into 2023. However, some of these tumultuous turns have given rise to changes from the IRS, including effects on our tax rules and retirement saving opportunities. Also, recent legislation can pave the way for more possibilities in the new year. You and your fiduciary financial advisor must keep these investment and tax changes for 2023 in mind as you create and procure your plan.
Here, we will discuss critical opportunities to investigate as you create and optimize your 2023 financial plan.
Increase in Retirement Account Contribution Limits
Some great news for retirement savers; contribution limits have increased for your individual retirement account and 401(k). The 2023 employee deferral limit is up from $20,500 to $22,500, and those 50 and older have an increase in catch-up deposit limits from $6,500 to $7,500. These changes apply to most 457 and Thrift Savings Plans and 403(b) plans.
The limits have been adjusted for IRAs, allowing savers to put away $6,500 for 2023, up from $6,000 in 2022. The amount for those making a catch-up deposit is still $1,000 for 2023, but in 2024, it will index to inflation.
Tax Bracket Changes Tied to Inflation
A significant financial planning element that advisors and their clients will be keeping an eye on is the change in tax obligations due to bracket threshold increases.
The IRS announced that federal income tax brackets would be higher for 2023, meaning you can make more income before reaching the next earning tier.
In addition, there is an increase in the standard deduction for couples filings jointly in 2023 to $27,700, elevated from $25,900 in 2022. Single filers can claim a standard deduction of $13,850 for 2023, an increase from $12,950 in 2022.
Income Threshold Change for Long-Term Capital Gains
When and if you decide to sell any investments from a taxable portfolio account in 2023, you will be less apt to signal a bill for long-term capital gains.
The IRS has increased the income thresholds for the 0% rate, 15% rate, and 20% rate long-term capital gain income brackets for 2023, which will be applied to assets owned for over one year.
This change and greater standard deductions allowed in 2023 mean you are more likely to land in the 0% tax bracket. You may fall into this 0% tax bracket in 2023 if you have a taxable income of $44,625 or less as a single filer and $89,250 or less as a married couple filing jointly.
Increase in Income Limit for ROTH IRA Contributions
The inflation adjustments for 2023 will also allow more investors to qualify for Roth IRA contributions than previously allowed.
The adjusted gross income limit ranges that allow for Roth IRA contributions will increase to $138,000 and $153,000 for individual single filers and $218,000 and $228,000 for married couples filing jointly. The updated income ranges may allow investors to take advantage of a Roth IRA contribution rather than a more complex backdoor Roth conversion as they seek to optimize their portfolios in 2023.
Extra Time for Required Minimum Distributions (RMDs)
At the end of 2022, Congress passed an appropriations bill that included several retirement provisions, known as “Secure 2.0.” One such provision is to update 2023 Required Minimum Distributions that must be taken annually from certain retirement accounts.
Previously, RMDs begin when you turn 72 years old, with an April 1st deadline of the following year to make your first withdrawal and a due date of December 31st for the following years. With the changes in Secure 2.0 in 2023, the age for these withdrawals will be 73 in 2023 and 75 in 2033. It should be noted that those currently taking RMDs will not be affected.
With this much happening within the IRS and Congress, it’s paramount to stay abreast of these investment and tax changes for 2023. You and your fiduciary financial advisor can take a step back, digest these new provisions, and adjust your plan holistically to make the best strategic moves for you if needed.
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