When you’re saving for retirement, tax-advantaged retirement accounts can make a big difference. Individual retirement accounts (known as IRAs) are likely the best method for saving for most people. There are many different types of IRAs, allowing pre-tax or post-tax contributions, employer-sponsored or personal, and even some designed for armed forces members. Each type of IRA will have different rules and contribution limits, and these can change every year. Limits are set by the IRS, with inflation being a big factor in their decision to update contribution limits. Because inflation has been rising lately, the IRS has provided several changes around contribution limits for retirement accounts in 2023.
How do retirement account contribution limits work?
Contribution limits are placed on retirement accounts so that high-income earners can’t unfairly take advantage of tax-free savings. These limits aren’t set in stone, though. Since inflation changes the value of a given amount of money over time, it wouldn’t make sense to keep the same limits year-to-year as the real value could change drastically. So the IRS decided to keep contribution limits indexed to inflation. Each year the limits are reassessed and inflation is taken into account when setting the new limits.
Some years (like in 2020) contribution limits aren’t changed because inflation isn’t quite bad enough to merit it. However, in years like 2021, a thirty-year-high inflation rate has a big impact on both spending power and contribution limits. It’s important to note that these contribution limits apply to retirement accounts differently, based on the account type.
The deadline to make contributions for the 2022 tax year is April 18, 2023.
Digital Asset IRAs
Digital assets are a growing new asset class in the 21st-century (think cryptocurrency like Bitcoin and Ethereum). For people who want to invest in digital assets while getting the tax advantages of retirement accounts, a Digital IRA, or cryptocurrency IRA, is the best choice. To invest in a Digital IRA, you will need a self-directed IRA (SDIRA), which gives you more access and control over your investments than traditional retirement accounts.
A self-directed IRA can be funded from rollovers of most types of retirement accounts like 401(k)s, SEP, and SIMPLE retirement plans.
What’s new for 2023?
In 2023 retirement account contribution limits have seen a change due to inflation. Traditional and Roth IRA contribution limits increased to $6,500 in 2023, up from $6,000 in 2022. Contribution limits for 401(k) accounts have increased as well, going from $20,500 in 2022 to $22,500 in 2023.
Changes to retirement account contribution limits
Here is a summary of the contribution limit changes to every type of retirement account for the 2023 tax year. Details on each retirement account type are listed below the table.
| Account Type | 2023 Contribution Limit | 2022 Contribution Limit | 2023 Catch-up contribution limit (> age 50) | 2022 Catch-up contribution limit (> age 50) |
| Traditional IRAs | $6,500 | $6,000 | $1,000 | $1,000 |
| Roth IRAs | $6,500 | $6,000 | $1,000 | $1,000 |
| 401(k)s | $22,500 | $20,500 | $6,500 | $6,500 |
| SIMPLE IRAs | $15,500 | $14,000 | $3,500 | $3,000 |
| SEP IRAs | $66,000 or 25% of net earnings | $61,000 or 25% of net earnings | N/A | N/A |
| 403(b)s | $22,500 | $20,500 | $6,500 | $6,500 |
| 457(b)s | $22,500 | $20,500 | $6,500 | $6,500 |
| TSPs | $22,500 | $20,500 | N/A | N/A |
| HSAs | Individual – $3,850
Family – $7,750 |
Individual – $3,650
Family – $7,300 |
N/A | N/A |
Types of retirement accounts
Traditional IRAs
A Traditional IRA is a retirement savings account in which pre-tax dollars are invested. Because it’s pre-tax, any money invested into a Traditional IRA is not taxed today, thereby lowering your income (and today’s income taxes, too). However, any money you withdraw during retirement will be subject to income taxes.
Anyone can invest in a Traditional IRA, regardless of employment status or income. This makes Traditional IRAs the most accessible retirement savings vehicle available.
Roth IRAs
Instead of investing pre-tax dollars toward retirement, Roth IRAs allow you to invest after-tax dollars. The difference is that by paying taxes on contributions today, savings you withdraw in retirement are completely tax-free. But unlike Traditional IRAs, not everyone can invest in a Roth IRA as the retirement account is limited by income.
For instance, in 2022, the income limits for the full Roth IRA contribution were $129,000 and $208,000 for individual and joint filers, respectively. These income limits are now changing to $138,000 and $218,000 for 2023.
401(k)s
As an employer-sponsored retirement account, 401(k)s are managed and controlled by your employer. Your employer may offer a Traditional 401(k) option, a Roth 401(k) option, or both.
Generally, a 401(k) plan allows you to choose investments from a pre-selected list set by your employer. A benefit of a 401(k) is that your employer may contribute additional funds toward your balance, which is essentially “free” money for retirement.
SIMPLE IRAs
A SIMPLE IRA — short for Savings Incentive Match Plan for Employees — is a retirement plan for smaller employers. SIMPLE IRAs have lower costs and expenses than 401(k)s, while allowing for higher contribution limits than Traditional IRAs. This type of retirement account is most often found among small businesses.
SEP IRAs
In a Simplified Employee Pension (SEP) IRA, an employer contributes funds directly to their employees’ IRA plans. Most often, SEP IRAs are used by self-employed individuals who can increase their IRA contribution limits through the retirement account.
403(b)s
403(b)s are similar to 401(k)s for nonprofit organizations and public school systems. 403(b)s have identical contribution limits and restrictions as 401(k)s and some added benefits like shorter vesting periods for contributions and an exemption from nondiscrimination testing (a test to ensure an employee-sponsored retirement program doesn’t unfairly favor highly-compensated employees and owners).
457(b)s
Employees of state and local governments have their own type of retirement account known as a 457(b). A 457(b) account is similar to a Traditional IRA in that it allows for pre-tax contributions.
Thrift Savings Plans (TSPs)
A Thrift Savings Plan (TSP) is a type of retirement account restricted to members of the armed forces and employees of the federal government. TSPs are the most limited type of retirement account, with only six funds available for investment. However, TSPs are very beneficial as they have high contribution limits and no income restrictions.
HSAs
Another way to save money on taxes is through a Health Savings Account (HSA). You can deposit money into an HSA to pay for qualified medical expenses. This money is deposited pre-tax, and therefore exempt from federal taxes.
However, HSAs are only available for those who have high-deductible health insurance plans: $1,500 for an individual or $3,000 for those with family coverage.
What does this mean for Digital IRAs?
With growing interest in new technology and increasing distrust in traditional finance, 2023 looks to be a strong year for digital currencies. Thanks to increases in the contribution limits for many standard retirement accounts, individual investors are set to benefit from investing more tax-advantaged money into this new and growing asset class.
While future growth is unpredictable and entirely speculation, many experts expect cryptocurrencies will have massive growth in the coming years, all the more reason to reduce future taxes through an SDIRA.
While contribution limits are changing, it’s essential to know that this won’t change your ability to invest in digital assets via these tax-advantaged retirement accounts. In fact, with higher contribution limits, you can now consider investing even more into a Digital Asset IRA.
BitIRA is here to help you navigate your Digital Asset IRA needs, whether it be opening a new SDIRA account, rolling over an existing account, or maxing out your contributions for the coming year. Get in touch with BitIRA today to learn more about how you can maximize your retirement savings through digital assets.