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IRS Raises 401k Contribution Limits for 2023

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January 2023 begins a new tax year and with it, the IRS increases Solo 401k contribution limits. This means you can put more money into your retirement plan, and increase your tax deduction based on those contributions. The Defined Contribution Limit for 2023 is $66,000 (up from $61,000 in 2022). If you are age 50 or over, the total contribution limit is $73,500.

An employer-based 401k might limit your allowable contribution (and tax deferral). However, you can reach the full $73,500 contribution limit by controlling your own retirement with a Solo 401k account. Through your Solo 401k, you gain full control as both an employee and the employer/owner of your business. Just as important, you also gain full control of what you can invest in.

When your spouse also participates in a Solo 401k, the potential contribution limit doubles to $147,000!

Also important is the increase of $2,000 to the employee contribution limit for calculating contributions.

The three big changes for 2023 are:

  • Defined contribution maximum limit, all sources (increases $1,000).
  • Defined contribution maximum limit for people age 50 or older by year-end; this is the catch-up portion (brings the total increase to $1,500).
  • Employee compensation limit for calculating contributions (increases $2,000).

Increased 401k Contribution Limits Equals Increased Solo 401k Advantages

The Solo 401k continues to have big advantages over the traditional IRA for tax deferment. This year’s rise in the Solo 401k contribution limit further increases the tax advantage gap. That’s because traditional IRA contribution limits have remained unchanged since 2019. They remain comparably low at $6,500 ($7,500 if you’re age 50 or older). The last increase in IRA contribution limits was $500 from tax year 2018 to 2019 (the 2018 limit was in effect since 2015). Fortunately, you can depend on Solo 401k contribution increases to try to keep pace with inflation.

If you already have a Solo 401k retirement plan, you are good to go for increasing your tax-deferred contributions as of January. If you don’t yet have a Solo 401k account but don’t want to miss out on yet another year of these tax-saving and retirement financial advantages, you need to review the simple qualification requirements. Or you can further your education about why you want to take full control of your retirement account.

Break Down of the Three Annual Contribution Limit Increases

Your total Solo 401k contribution limits come from three separate funding sources. These work together for the full $66,000 tax-deferred contribution available in 2023 (or $73,500 if you are age 50 or over).

  1. Employee contribution limit. This is the amount that comes from your salary or wages. These contributions are made before you pay personal taxes. The effect is to reduce your annual taxable income while also increasing your retirement savings. In 2023, this limit increases to $22,500.
  2. Employer contribution. The beauty of the Solo 401k is that you are your own employer and can potentially fund this portion up to the full limit of $66,000 (or $73,500 if you are age 50 or over). The limit is a combination of both the employee and employer contributions. The tax advantage here is that the employer contributions are a business expense before paying taxes.
  3. Catch-up limit. This is how you increase the limit from $66,000 to $73,500. The catch-up limit applies if you are over age 50. You are entitled to an additional employee contribution of $6,500 (same as 2022).

A Solo 401k Works Alike for the Young, the Old, and the Independent

The young or older entrepreneur has many possibilities out there for business ownership. Entrepreneurs have every reason to open a Solo 401k. Almost every independently operated business qualifies. The key qualification is being self-employed.

Today, tens of millions of Americans rely solely on an employer-sponsored 401k as the source for their retirement income. Your money is in the employer’s account and limited to what they allow you to invest in (almost always Wall Street). The employer decides how much they contribute to your future financial security. The employer makes the rules.

By starting a small side gig, you can take full control of your retirement account to invest it any way you see fit. You no longer have to financially depend on big business for your retirement years. Anyone can take full control of their financial future by investing in real estate, or the modern cryptocurrency economy, or green technologies, or anything else. Employers and Wall Street have no say in how you invest your Solo 401k. That’s because the Solo 401k is connected to your business. As your own 401k plan administrator, you make the rules of how your 401k funds are invested.

Increase Your Retirement Savings By Running Your Own Business

The 83.2 million Millennials have a different view of how the world should be both today and tomorrow. They are also the financial backbone in today’s economy to make change happen. For the good of both themselves and to shape the future. One major change Millennials have already made is switching employers often to work on projects of their own choosing. Changing jobs has the effect of leaving behind employer-sponsored 401ks. These are 401ks that you still own but may no longer be managing. The Solo 401k is the perfect answer for consolidating your past accounts back into your full control. Also for investing them as you see fit. The answer is a rollover Solo 401k account.

There are also plenty of good news for Baby Boomers who are at or near the threshold of retirement. As you approach retirement, you have more options than you might be thinking about. You’re not ready for the rocking chair just yet because you have a lot of interests to keep you mentally and physically active. These usually become full-blown hobbies in retirement. Why not turn your hobby into a small business that provides both a retirement income and a tax shelter? The Social Security annual exempt amount increased 2023!

A Solo 401k can even provide startup funding for a new business. And the catch-up contribution allowed with the Solo 401k is perfect for Baby Boomers. There is no reason why you can’t enjoy retirement while still earning an income doing what you want for another 10 or 20 years. It’s the answer to a fully funded retirement if you’re not quite there yet.

Going Post-Pandemic with New Opportunities

For the Millennial, for the Baby Boomer, along with freelancers, entrepreneurs, and sole proprietors, 2023 is the time to take full control of your retirement finances. The 2023 increase in contribution limits is one more reason to begin building your secure financial future as we head into a post-pandemic normal. One of the best decisions for your future is a Solo 401k.

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