Unprecedented Increase To Contribution Limits

Retirement accounts and medical expense accounts will be receiving some of the largest increases to contributions limits in 2023. Contribution limits are tied to inflation.

Hey guys what’s up i’m erin and welcome back to the channel retirement account and health savings accounts will be getting a boost to their limits in 2023 and these limit increases are sizable because of our current inflation levels all of these tax advantaged accounts have limits just know that anytime the government is willing to give you a tax break there’s

Going to be limits on it but still these accounts are wonderful i am a huge fan of them and i think you should take advantage of them whenever they’re available to you for instance let’s say you have 500 to invest every single month throughout your entire working career let’s look what that would turn into if you use different types of accounts we will look at

Three account types taxable faces tax consequences annually on earnings and withdrawals made in the year an example of this would be a traditional brokerage account a tax deferred account money grows tax-free until you start making withdrawals an example of this would be a traditional ira and a tax-free account generally meaning you would add post-text dollars to

The account and then it grows tax-free and then withdrawals are made completely tax-free an example of this would be the roth ira well in a traditional taxable account five hundred dollars invested every single month over 40 years would grow to roughly 1.5 million dollars in a tax deferred account that would grow to roughly 2.5 million dollars that’s the assumed

Value after paying taxes on your withdrawals and the tax-free account the value would be roughly 2.9 million dollars so clearly allowing your money to grow and not having to pay taxes on it each and every single year is a huge advantage over the course of an entire investing career that can result in over a seven figure difference as always if you’re interested in

Playing with this calculator if you want to play with the rates of return the amount invested the tax rate faced etc things like that i will link it down below in the description box that way you can personalize it to your needs with that let’s dive into the accounts that are getting a boost to their contribution limits the 401k the tsp the 403 b and the 457b all

Share the same contribution limits in 2023 you will be able to contribute up to 22 500 which is a two thousand dollar increase from the limit for 2022. these account types are all defined contribution plans employees take a percentage or a portion of their paycheck contribute it to the account for their future retirement and as of 2021 roughly only 67 percent of

Employees had access to these retirement plans i think if you have access to one count yourself as lucky and take advantage of it but sadly only 52 percent of workers who have access to these plans actually participate in them participation is much better in the government sector coming in at 82 percent just a fun fact i’ve actually never worked a job where i’ve

Had access to a 401k so i’ve always been really jealous of these high contribution limits if you are able to max out this account type it does put you in a pretty special category as only 12 percent of workers actually max out their 401k in any given year for many people maxing out this account type stocking away an additional 22 500 just isn’t feasible but if you

See also  Fintech Platform for Structured Products

Can more power to you and i think that’s fantastic now if you are 50 or older you are eligible for catch-up contributions of seven thousand five hundred dollars an increase in one thousand dollars from the previous year making your annual max contributions thirty thousand dollars next up we have the traditional and the roth ira max contribution limits will be six

Thousand five hundred dollars in 2023 an increase of five hundred dollars from 2022. now i love the ira the only thing you need to qualify for an ira is earned income that’s it if you make money and pay taxes you can open your own ira i think every worker should have one and you would think the vast majority of workers do right they don’t only 35 percent of u.s

Taxpayers have an ira account 24 have a traditional ira and 11 have a roth ira those numbers are honestly so low that it breaks my heart a little i just know that not every employee has access to retirement accounts through their employer iras are a great option every employee has access to them and it allows your money to grow completely tax-free of course you do

Have to take the initiative yourself to open up this account but it is super easy to do just find a low-cost brokerage house like vanguard fidelity or charles schwab they’re all great options and you can have this account open in less than 10 minutes i honestly wish the contribution limits were higher this is literally the most inclusive retirement account option

Available to all workers nonetheless it has the lowest contribution limits there are catch-up contributions for both of these accounts if you are 50 or older and that amount is a thousand dollars same as it was in 2022 meaning that you could contribute up to seven thousand five hundred dollars when it comes to a traditional ira you contribute pre-tax dollars so

Money you haven’t paid taxes on yet it gets to grow completely tax-free and then once you start taking withdrawals in retirement then you pay taxes on it it’s also important to note that this account type does have required minimum distributions once you reach a certain age if you have a roth ira you contribute post-tax dollars so money you’ve already paid taxes

On it grows completely tax-free and then once you start taking withdrawals in retirement you can take that money out completely tax-free you can contribute to a traditional ira no matter what your income on the other hand a roth ira faces income limits those two are being upped in 2023 with the phase out starting for individual tax filers at one hundred and thirty

Eight thousand and two hundred and eighteen thousand for those married and filing jointly at an often forgotten about perk of the the ira is that you’re allowed to make contributions until the tax season closes for instance you can still make 2022 contributions until april 15th of 2023. so if you’re running a little bit behind and you want to max out this account

But it feels like the end of the year is a little bit too close and you feel rushed don’t worry you still probably have some time on your hands as long as you can get that in before april 15th next we have contribution limits for sep accounts or simplified employee pensions which will increase to 66 000 in 2023. anyone who is self-employed owns a business or has

Freelance income can open their own sep account to help boost their retirement savings the money goes into the account tax-free it grows tax-free and then the withdrawals are taxed once you start taking them out in retirement now the limits on an account of this type are incredibly high but there is a catch you can only contribute up to 25 of your income if you’re

See also  How to Write the Best Hardship Letter - The 5 Valid Hardship Reasons

Self-employed because of tax restrictions it actually ends up being about twenty percent of your income so that would mean in order to max out this account type you would actually have to have an income of over three hundred thousand dollars that’s no small feat to be sure but even with a lesser income it does allow you to put more money away into a tax deferred

Account a tax advantaged account allowing you to save more for your future as of 2022 36 percent of u.s workers participate in freelance work making this account type an incredible option for them but sadly i don’t feel like this account type actually gets the attention it deserves now of course this account isn’t perfect it does have drawbacks especially when it

Comes to small businesses with just a handful of employees but if you are a freelance worker or you are self-employed with no additional employees i think this account is a great option simple ira contribution limits will increase to 15 500 in 2023 that is a one thousand five hundred dollar increase from the limits in 2022 2. simple iras function pretty similarly

To a traditional ira or a traditional 401k they’re cost effective and easy for small businesses to operate and they are only available to businesses that have less than 100 employees the downside of a simple ira is that its contribution limits are lower than those of a 401k or a tsp or account type like that but they’re still a great option as it allows you to put

Your money into a tax advantage account and many of them have great investment options a perk though is that employer matching contributions are mandatory usually it’s two to three percent but as long as you elect to participate in the plan the employer contributions are mandatory so who doesn’t love mandatory free money the final account types that are seeing a

Boost in 2023 aren’t technically retirement accounts but rather their accounts geared more towards medical expenses the hsa or health savings account limits for individuals will be 3 850 and seven thousand seven hundred and fifty dollars for families in twenty twenty three an increase of two hundred dollars and four hundred and fifty dollars respectively hsas are

Only available if you have an employer who offers a high deductible health plan and they’re there so you can set money aside to help cover your medical expenses the money that you put in goes in pre-tax so you don’t pay taxes on it once the money’s in the account you are allowed to invest it and it can grow completely tax-free note that most people do not invest

The money in their hsa it’s a great option but really only seven percent of hsa users actually invest that money and then once you decide that you want to take a withdrawal from this account as long as you’re using that money for a qualified medical expense you get to take it out completely tax-free so if you use it just for medical expenses it goes in tax-free

Can grow tax-free and comes out completely tax-free so this is money you never have to pay taxes on any unused funds in this account at the end of the year simply roll over into the next year you don’t have to use the money immediately you can carry it in this account with you for years many people actually carry their hsa accounts into retirement and use it to

See also  I Bonds Explained: How To Buy With Treasury Direct Site & Yotta App

Cover health care costs once they’re retired and as long as you use it for medical costs you never face a tax consequence on the money in this account but many people who are financially savvy and build up their hsas actually decide to use it for retirement expenses in that way it does get treated more like a traditional ira so you are taxed if you take the money

Out to use it to cover things that are non-medical related but it can serve as a backup retirement account if you want to approach it like that keep in mind that if you make a non-medical withdrawal prior to the age of 65 there is a hefty 20 penalty on top of the taxes already owed on the withdrawal so i wouldn’t recommend using it for non-medical expenses especially

Prior to a retirement age finally we have the fsa or the flexible spending account and it will have contribution limits of three thousand fifty dollars in 2023 an increase of two hundred dollars from 2022. these accounts are not available to those who are self-employed but they are available to those who have an employer-sponsored health plan and it does not have

To be a high deductible plan contributions are made to an fsa account pre-tax so you don’t pay taxes on it and as long as you withdraw it to pay for approved medical expenses it comes out completely tax-free money going into an fsa cannot be invested and it must be used by the time the year ends because if you don’t use it you lose it each year the account starts

With a fresh balance of zero you might notice that the increase in the contribution limits for the retirement accounts was about eight or nine percent in each category this increase is pegged to inflation when inflation runs higher the contribution limits rise faster when inflation is lower contribution limits rise more slowly 2022 has been a high inflation year so

It’s only fitting that these accounts are getting a bit of a bigger boost what account types do you have access to do you try to max out your accounts or do you simply contribute a percentage let me know in the comments down below i post new videos every single week if you got anything at all out of this one please give it a like if you’re new here please consider

Subscribing or if you know of someone who might get something out of this type of content please consider sharing i’ll see you soon bye and sell all of these tax time matter what to have limits for instance allowing your money to not sure if you can hear the geese you’re interested in analyze it to your liking no not their paycheck drink control because hey if

You don’t use it contribute it to the ah lands employees it’s a fun fact oh able to max out contribution limits operate and have duration limits are slower inside of a simple nah this account type way an additional just know that oh option that is retirement option tax dollars money high deductible once you start taking withdrawals foreign income open up a self

Account a slaw you reach retirement you

Transcribed from video
'Unprecedented' Increase To Contribution Limits By Erin Talks Money