Americans can sock away much more money next year in their retirement accounts — thanks to higher prices.
The Internal Revenue Service on Friday released the maximum annual contributions to 401(k) and similar retirement accounts along with individual retirement accounts, or IRAs. The increases are the largest since 2007 when inflation-adjusted limits were enacted.
The increases reflect the 40-year high inflation rates Americans have been grappling with and allows them to keep their retirement savings on pace with the current economic environment.
"The big news here is the amounts that can be contributed to retirement plans," Lisa Featherngill, national director of wealth planning at Comerica Bank, told Yahoo Money. "The benefit of saving through a retirement plan is twofold: the current reduction in taxes and the tax-deferred growth inside the plan. Although the funds are taxed when withdrawn, the compounding of the enhanced (tax-deferred) rate of return can mean significantly higher balances than taxable accounts with the same investments."
Workers who have a 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan can contribute up to $22,500 next year, up from $20,500. That's a 9.7% increase. For those 50 and over, they can save an additional $7,500, up from last year's $6,500 catch-up contribution limit. In total, workers who are 50 and older can contribute up to $30,000, starting in 2023.
The annual contribution limit for IRAs increased to $6,500, up from $6,000, an increase of 8.3%. Individuals 50 and over can save an additional $1,000 to IRAs, unchanged from last year.
For those who participate in SIMPLE plans — which provide small employers with a way to contribute toward their employees' and their own retirement savings — the maximum amount individuals can contribute is $15,500, up from $14,000. The catch-up contribution limit for workers 50 and over in SIMPLE plans will increase to $3,500 from $3,000.
"For people who have had an increase in pay recently — either by switching jobs, getting a promotion or a bonus — this could be a good opportunity to put more of that income away for their future retirement," Kelly LaVigne, vice president of consumer insights at Allianz Life, told Yahoo Money.
"While the current market downturn may have affected retirement plan balances, the lower current price per share combined with the larger contribution amounts could really help those who would need to save more for retirement," LaVigne added, "either to make up lost ground or to help make up for rising costs and market volatility."
New income thresholds for IRAs
Individuals can only contribute to Roth IRAs if they meet certain income conditions. The income phase-out for Roth IRA contributions change as follows:
Singles and heads of household: $138,000 and $153,000, up from $129,000 to $144,000
Married couples filing jointly: $218,000 and $228,000, up from $204,000 to $214,000
Married individual filing separately: Remains between $0 and $10,000
Taxpayers can deduct contributions to a traditional IRA in many cases, but the deduction may be reduced or eliminated depending on filing status and income. Here are the phase-out ranges for next year.
Single taxpayers covered by a workplace retirement plan: $73,000 and $83,000, up $68,000 to $78,000
Married couples filing jointly, if the spouse making the contribution is covered by a workplace retirement plan: $116,000 and $136,000, up from $109,000 to $129,000
An IRA contributor not covered by a workplace retirement plan and married to someone who is covered: $218,000 and $228,000, up from $204,000 to $214,000
Married individual filing separately covered by a workplace retirement plan: Remains between $0 and $10,000
Finally, the income limit for the Saver’s Credit for low- and moderate-income workers is $73,000 for married couples filing jointly, up from $68,000; $54,750 for heads of household, up from $51,000; and $36,500 for singles and married individuals filing separately, up from $34,000.
Janna is the personal finance editor for Yahoo Money. Follow her on Twitter @JannaHerron.