The latest figures on inflation and cost-of-living adjusts suggest a substantial annual increase to TSP contribution limits.
How much can be contributed to a savings account?
For retirement plans like 401(k)s, the TSP, and 403(b)s, which are employer-based, there is an annual limit that can be deposited, pre-tax, from your paycheck to this type of account. Likewise, there are similar annual limits for deposits made to IRAs, Roth IRAs, Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and SIMPLE IRAs – but not all of these can be done with pre-taxed income. Regular savings accounts without any special tax rules don’t have yearly contribution limits (at least by law), but usually there might be a maximum amount that the banking institution will insure.
What factors determine annual contribution limits?
Regarding the Thrift Savings Plan (TSP), the maximum yearly contribution amounts are determined by cost-of-living and inflation indices. The IRS can also set rules that decide what the limits will be. This is most likely how, even if the limits for TSP and 401(k)s are dependent on differing calculations and inflation numbers, the annual maximum between the two is always identical. (Same goes for the catch-up contribution amounts, which essentially raises the annual limit for those age 50 or older.) The main point being is that all of these maximum contribution amounts are tethered to inflation. And 2022 has been a year unlike any other since the 1980s when it comes to inflation.
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Basically, with the information we know about the recent escalation of prices for consumer goods, up to the end of September, it becomes easier for economists to predict what the 2023 contribution increases will be.
2023 Contribution Limit Increases
|Account Type||2022 Contribution Limit||Projected 2023 Limit||Projected Increase|
- Based of what we know about 401(k) and TSP contribution limits, it is therefore safe to say the projected increase for the next year’s TSP contribution limit is identical: $22,500, a $2000 increase from 2022.
Roth IRA Income Limits
For Roth IRAs, you are only allowed to contribute directly is your annual adjusted gross income (AGI) is below a certain ceiling. There is also a range of AGI amounts where the closer it gets to hitting that ceiling, the less you are able to contribute. For single filers and those who file their tax return as head of household, the current income limit is $144,000/year currently. Starting at an AGI amount of $129,000, the phase-out starts to apply. The ceiling for 2023 is projected to be $153,000 with the phase-out beginning at $138,000. For married couple filing jointly, their combined AGI limit is $214,000 for 2022, phase-out begins at $204,000. This range is expected to increase in 2023 to the following: $218,000 to $228,000.
But to contribute to a Roth TSP account, there are no income restrictions. Federal employees can have all of their employee contributions put in a Roth TSP account, although both the government and agency matches are pre-tax and therefore have to be place in a traditional TSP account. Read more about the differences between Roth IRAs and the Roth TSP here.
A Grain of Inflation
It is worth noting that these projections were made by those who still predict the 2023 COLA for Social Security to be 10.5% despite evidence indicating that inflation is recently easing. The current COLA is expected to be closer to 8.7%. So, while these projections are probably in the ballpark of what the actual 2023 contributions limits will be, we’ll have to wait until the end of the year is closer before knowing for sure, and take these predictions with a grain of salt. The actual contribution limits are often unveiled by the IRS within the last two months of the calendar year.
Until Next Time,
**Written by Benjamin Derge, Financial Planner, ChFEBC℠ The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Benjamin Derge and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Expressions of opinion are as of this date and are subject to change without notice. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors.
***The Thrift Savings Plan (TSP) is a retirement savings and investment plan for Federal employees and members of the uniformed services, including the Ready Reserve. The TSP is a defined contribution plan, meaning that the retirement income you receive from your TSP account will depend on how much you (and your agency or service, if you're eligible to receive agency or service contributions) put into your account during your working years and the earnings accumulated over that time. The Federal Retirement Thrift Investment Board (FRTIB) administers the TSP.***