The IRS announced one of its biggest increases in decades to the limits on retirement contributions. Investors with 401ks and IRAs have the opportunity to make larger investments in their retirement while reducing taxes with tax advantage plans like the Solo 401k and self-directed IRA.
Solo 401k Contribution Limits for 2023
It may be time for you to adjust your Solo 401k contribution budget for 2023 or open an account if you haven’t already. On October 21, 2022, the IRS announced an increase of $2,000 to contribution limits for Solo 401k accounts (almost a 10% increase). The cost-of-living adjustment brings the 2023 employee salary deferral contribution limit to $22,500 (up from $20,500). Individuals age 50 and older can contribute an additional $7,500, increasing for the first time since 2020.
That brings the total employee contribution limit in a 401k plan for those 50 and older to $30,000.
Keep in mind that Solo 401k accounts are made up of two parts. The employee contribution and the business profit-sharing portion. The total Solo 401k maximum allowed contribution will increase by $5,000 from $61,000 in 2022 to $66,000 in 2023.
Quick Numbers: Solo 401k Contribution Maximums
- Employee Salary Deferral Contribution: $22,500 maximum
- Catch-up Contribution: $7,500 maximum (for those age 50 or older)
- Total Solo 401k contribution:
- $66,000 or;
- $73,500 for those age 50 or older
If your spouse participates in the Solo 401k plan with you, those contribution numbers double:
- $132,000 total contribution between both spouses
- $147,000 total contribution between both spouses, if both participants are age 50 or older
Wondering how much you can contribute? Check out our contribution calculator to run your numbers.
The Solo 401k Contribution Tax Advantage
A good thing about a Solo 401k is that you can pick your tax advantage. You can choose the traditional Solo 401k, where contributions reduce your income in the year they are made. In that case, distributions in retirement will be taxed as ordinary income. The alternative is the Roth Solo 401k, which offers no initial tax break but allows you to take tax-free distributions in retirement (you never pay taxes on the earnings in a Roth 401k). In general, a Roth is a better option if you expect your income to be higher in retirement or if you expect to have exceptionally high earnings in a particular year. If you think your income will go down in retirement, opt for the tax break today with a traditional Solo 401k. You can also make both contributions in the same tax year, but you must stay within the total contribution limits. Nabers Group makes this easy by including both the traditional and Roth types in the same Solo 401k account at no extra cost to you.
IRA Contribution Limits for 2023
The Traditional or Roth IRA contribution limit will go up by $500 from $6,000 in 2022 to $6,500 in 2023. If you are age 50 or over by December 31, the catch-up limit is fixed by law at $1,000 in all years.
If you put money in a traditional IRA, you may be able to deduct some or all your contributions (no deduction is available for contributions to a Roth IRA). However, the deduction is gradually phased-out if your income exceeds a certain amount. For 2023, the phase-out ranges are:
- $73,000 to $83,000 for a single person covered by a workplace retirement plan (up from $68,000 to $78,000 in 2022).
- $116,000 to $136,000 for a married couple filing jointly if the spouse making the IRA contribution is covered by a workplace retirement plan (up from $109,000 to $129,000 in 2022).
- $218,000 and $228,000 for a married couple if the spouse contributing to an IRA is not covered by a workplace retirement plan, and the other spouse is covered (up from $204,000 and $214,000 in 2022).
- $0 to $10,000 for a married person filing a separate return who is covered by a workplace retirement plan (the same as 2022 because this range is not subject to an annual cost-of-living adjustment).
Income limits for Roth IRA contributions will increase in 2023 as well.
- The income phase-out range for Roth IRAs will be between $138,000 and $153,000 for single filers and heads of household (up from between $129,000 and $144,000).
- The range for married couples filing jointly goes up from $218,000 to $228,000 (between $204,000 and $214,000).
- The phase-out range for married individuals filing separately remains at $0 to $10,000.
As the phase-out thresholds rise, more people will qualify for the full deduction – especially if your income remains flat from 2022 to 2023 or increases at a rate that’s less than the rate of inflation.
Tax Brackets Are Also Being Adjusted
The IRS has also announced a tax bracket inflation adjustment for the 2023 tax year. The adjustments raise the thresholds for federal tax brackets for income taxes for 2023. This could mean you remain in the same tax bracket next year even if your income increases. If your income does not increase, it could mean you will be in a lower tax bracket.
The IRS confirmed that some tax filers would see savings on their bills as the agency adjusted tax brackets by about 7%. This is to combat the effects of rising costs on consumers. Keep this in mind, tax rates — as opposed to brackets — did not change compared to 2022. The IRS will use the same seven rates. The top limit for each bracket will rise. That means in 2023, it will take higher income to become subject to each tax bracket. In the two charts below, you can compare the 2022 and 2023 tax brackets.
2022 Federal Tax Brackets With Each Bracket’s Marginal Tax Rate, Based On A Taxpayer’s Taxable Income
|Tax rate||Single filers||Married joint filers||Heads of households|
|10%||$0 – $10,275||$0 – $20,550||$0 – $14,650|
|12%||$10,276 – $41,775||$20,551 – $83,550||$14,651 – $55,900|
|22%||$41,776 – $89,075||$83,551 – $178,150||$55,901 – $89,050|
|24%||$89,076 – $170,050||$178,151 – $340,100||$89,051 – $170,050|
|32%||$170,051 – $215,950||$340-101 – $431,900||$170,051 – $215,950|
|35%||$215,951 – $539,900||$431,901 – $647,850||$215,951 – $539,900|
|37%||$539,901 or more||$647,851 or more||$539,901 or more|
2023 Federal Tax Brackets With Each Bracket’s Marginal Tax Rate, Based On A Taxpayer’s Taxable Income
|Tax rate||Single filers||Married joint filers||Heads of households|
|10%||$0 – $11,000||$0 – $22,000||$0 – $15,700|
|12%||$11,001 – $44,725||$22,001 – $89,450||$15,700 – $59,850|
|22%||$44,726 – $95,375||$89,451 – $190,750||$59,850 – $95,350|
|24%||$95,376 – $182,100||$190,751 – $364,200||$95,350 – $182,100|
|32%||$182,101 – $231,250||$364,201 – $462,500||$182,101 – $231,250|
|35%||$231,251 – $578,125||$462,500 – $693,750||$231,251 – $578,100|
|37%||$578,126 or more||$693,750 or more||$578,100 or more|
As a result, many taxpayers with the same or even slightly higher income in 2023 vs. 2022 will still be in a lower bracket. They’ll be subject to lower tax bills. Keep in mind that qualified contributions to a traditional Solo 401k and/or IRA will lower your annual income. Not only is the tax-deferred, but these can also be great tools to prevent you from creeping up into a higher tax bracket.
What Else Changed With 2023 Taxes and Income?
Keep in mind that this is not a full accounting of all the tax changes occurring in 2023. You’ll want an accountant or professional tax preparer to review your specific situation for other tax consequences not covered here.
Bigger standard deduction In 2023. Tax brackets are not the only tax provision changed by the IRS’s annual inflation adjustments. The adjustments also mean a larger standard deduction for 2023.
- The standard deduction for single taxpayers and married individuals filing separately rises to $13,850 for 2023. That’s up $900 from 2022’s $12,950 standard deduction.
- For married couples filing jointly for the tax year 2023, the standard deduction climbs to $27,700. That’s a $1,800 increase from 2022.
- For heads of households, the 2022 standard deduction will be $20,800 for the tax year 2023, up $1,400.
Itemized deductions. For 2023, inflation indexing does not affect itemized deductions. As of 2018 through 2022, there is no limitation on itemized deductions. That limitation was eliminated by the Tax Cuts and Jobs Act.
No personal exemption. The personal exemption for the tax year 2023 remains $0. That’s the same as it was for 2022. Elimination of personal exemption was a provision in the Tax Cuts and Jobs Act.
Social Security announced an 8.7% cost-of-living raise as older Americans struggle to keep up with rising costs. The cost-of-living adjustment was the highest since 1981.
Estate tax exclusion. Estates of decedents who die during 2023 have a basic exclusion amount of $12.92 million. That’s up from $12.06 million for estates of decedents who died in 2022.
The annual exclusion for gifts increases to $17,000 for the calendar year 2023. That is an increase from $16,000 for 2022. This is the amount you can give to someone else without having to pay a gift tax. Any gift above the exclusion is subject to taxes — unless you qualify for various legal loopholes.
Medical savings accounts. Inflation indexing that impacts tax brackets also affects medical savings accounts. Let’s say you’re a participant in a high-deductible plan who has self-only coverage. For the tax year 2023, your plan must have an annual deductible that is not less than $2,650. That’s up $200 from the tax year 2022. The deductible cannot be more than $3,950. That’s an increase of $250 from the tax year 2022. And for self-only coverage, the maximum out-of-pocket expense amount is $5,300. That’s an increase of $350 from 2022.
If you’ve got family coverage for the tax year 2023, the annual deductible must be at least $5,300. That’s up from $4,950 in 2022. The most the deductible can be is $7,900. That’s a $500 increase vs. 2022. For family coverage, the out-of-pocket expense limit is $9,650 for the tax year 2023, an increase of $600 from the tax year 2022.
Alternative minimum tax. The alternative minimum tax (AMT) exemption for single filers in the tax year 2023 is $81,300. The 2022 exemption amount was $75,900. The exemption is the amount that a taxpayer is allowed to deduct from their alternative minimum taxable income before calculating the taxpayer’s AMT liability. The exemption amount depends on a taxpayer’s filing status. The 2023 exemption is $126,500 for married couples filing jointly. It was $118,100 for married couples filing jointly in 2022.
Year after year, the Solo 401k remains one of the most flexible ways you have to manage multiple aspects of your taxes, investments, retirement, and wealth building. A solo 401K is an IRS-approved retirement plan for self-employed business owners (plus their spouses). If you work for yourself, the Solo 401k provides more investment options, the highest contribution limits, full control of investments, and the lowest fees of any fully self-directed retirement plan.
Setup Your Solo 401k Today
Others imitate, but as the #1 Solo 401k provider, we innovate. You can be a freelancer, independent contractor, or small business owner. Your business can be structured as a sole proprietorship or a formally structured LLC, C Corp, or S Corp. All of these meet the IRS qualifications for a Solo 401k as long as there are no outside full-time employees in any business owned by you and/or your spouse.
The Solo 401k from Nabers Group provides more investment options, the highest contribution limits, and the lowest fees of any fully self-directed retirement plan.
Signup by following the link or call us at 877-SOLO-401K (877-765-6401).