If you have been contemplating making more defined financial decisions, the New Year can be the ideal time to turn that aspiration into a resolution. Additionally, the government has made changes to tax rules, further prompting Americans to reevaluate their tax and financial strategies. Discover some components to bear in mind with your wealth management goals as we enter 2023.
Retirement Savings Accounts
In 2023, Internal Revenue Service (IRS) will increase the contribution limit for multiple types of retirement accounts, including:
- For those participating in 401(k), 403(b), and most 457 plans, the limit has risen to $22,500.
- The catch-up contribution limit for workers 50 and older participating in these plans will increase to $7,500.
- For those with IRAs, the annual contribution limit has grown to $6,500.
- The catch-up contribution limit for workers 50 and older will remain at $1,000.
Given these changes, you may wish to boost your contributions to retirement savings accounts to have higher returns later. It can also be helpful to consider your age. For example, once you pass 55, you may be able to withdraw some contributions from your 401(k) without incurring a penalty. If you have an IRA, you will be able to take a distribution without the 10% penalty past age 59 ½. Then, at age 62, you qualify to begin receiving some social security benefits. These factors can determine whether or not you will change how much you contribute to the account.
The rules for traditional IRAs also apply to Roth IRAs. These accounts enable people to transform pre-tax IRA funds into nontaxable Roth IRA money. The conversion amount is considered ordinary income, meaning it incurs tax, but all future profits and distributions don’t get taxed — provided they fall within established limitations.
Roth conversions are particularly beneficial for those who think their current tax liability is lower than it will be when they distribute assets in retirement. In other words, younger people with many years before retirement may opt for a Roth IRA.
Health Savings Accounts
Health Savings Accounts (HSAs) enable people to save pre-tax money to pay for eligible medical costs, helping them reduce their overall healthcare expenses. The maximum annual contribution limit for HSAs will also increase in 2023 from $3,650 to $3,850 for individuals and from $7,300 to $7,750 for families. Catch-up contributions for those 55 or older will remain at $1,000 for both account holders.
If you don’t have an HSA, you might want to figure out your eligibility to take advantage of these increased contribution limits. If you do use an HSA, know that you can make contributions until the April tax deadline.
Some employers will make contributions to their employees’ HSAs, as well. To find out if your employer is adding to your account, ask the HR department at your place of work.
The amount of a taxpayer’s income excused from income tax is the standard deduction. The standard deduction was significantly increased under the Tax Cut and Jobs Act of 2017 and was also indexed for inflation, setting a precedent for future years. With record inflation in 2022, the Standard Deduction will rise again in 2023 as follows:
- For single taxpayers and married people filing separately, the standard deduction will bump up from $900 to $13,850.
- For married couples filing jointly, the standard deduction will shift from $1,800 to $27,7000.
- For heads of households, the standard deduction will grow from $1,400 to $20,800.
Please note: These changes will not impact those who itemize their deductions.
The substantial changes to these standard deductions can significantly inform your financial planning for 2023. Additionally, since tax rates are remaining the same in 2023, you may fall under a lower marginal tax rate even with more income. The combined savings of increased standard deductions and a constant tax rate can set you up for long-term financial planning success.
Seek Full-Service Financial Planning from Park Place Financial
If you are unsure how changes will affect your wealth management strategy in 2023, or would simply like ideas for enhancing your financial planning, turn to Park Place Financial for expert guidance. Our team of certified financial planners works collaboratively to help clients establish objectives and develop personalized financial plans designed to meet short and long-term goals.
Park Place Financial adheres to its fiduciary duty to put clients’ needs above our interests. When you work with us, you will receive the utmost honesty, integrity, and transparency. To learn more about our financial planning services, contact us or set up your complimentary financial checkup.