5 Tax and Retirement Planning Ideas for 2023

What You Need to Know

Thanks to inflation, more income can now pass through the lower brackets than ever before.
On top of that, we are in a low-tax environment — for now.
High-net-worth clients who can afford to make big gifts now could save on estate taxes later.

Financial advisors have a slew of new retirement and estate tax planning opportunities to capitalize on in 2023. Hit the ground running by communicating these ideas to your clients early in the year. Timing is everything, and that’s especially true when it comes to tax planning. 

Inflation Benefits

Sure, inflation is a problem, but when it comes to tax planning, it’s an opportunity. The cost-of-living increases (inflation-adjusted amounts) for 2023 are the largest in history, expanding tax brackets and other tax benefits. Not only are we in a low-tax environment, but more income can now pass through the lower brackets than ever before. 

1. Increase Retirement Plan Contributions for 2023

More funds can be contributed to all types of retirement savings accounts in 2023. Many clients who are working can take advantage of these increases and may be able to contribute more to both IRAs and company plans (assuming they have the disposable income to do so). Identify clients who may be able to save more across several retirement accounts. 

Example

Joe, age 55, has a 401(k) plan with his company.

He can contribute a total of $7,500 to an IRA (or a Roth IRA as long as his income is below the Roth contribution income limits, which also increased for 2023). The regular IRA or Roth IRA contribution limit increased from $6,000 to $6,500 for 2023.

Since Joe is 55, he can also take advantage of the $1,000 catch-up contribution for those age 50 or older. It’s interesting that in this inflationary time, the $1,000 IRA catch-up contribution is one of the few limits in the tax code that does not increase. The tax law does not provide for it. 

Joe can also contribute a total of $30,000 to his 401(k) plan in combined pre-tax or Roth contributions (if his company offers Roth contributions). Unlike the Roth IRA, there is no income limit for making Roth 401(k) contributions. The base contribution limit for 2023 is $22,500, and the increased catch-up contribution of $7,500 bumps the limit up to $30,000. 

Assuming Joe has the disposable income or savings to make the maximum contributions, he can stash away a total of $37,500 [($7,500 in his IRA + $30,000 in his 401(k)]. 

If Joe is married and his spouse is 50 or older and also works for a company that sponsors a 401(k), the combined amount they can save for retirement this year alone is an impressive $75,000! ($37,500 x 2 = $75,000.) We have not seen these huge savings opportunities before, but thanks to inflation, they’re here now. Advisors should connect with clients who may be in a position to take advantage of this.

Self-employed clients can also increase their SEP or SIMPLE IRA contributions for 2023.

2. Take Advantage of Expanded Tax Brackets

Now let’s look at the 2023 tax brackets: 

Taxable Ordinary Income Brackets for 2023

Marginal Tax Rate 
Single
Married Filing Jointly

10%
$0 – $11,000
$0 – $22,000

12%
$11,001 – $44,725
$22,001 – $89,450

22%
$44,726 – $95,375
$89,451 – $190,750

24%
$95,376 – $182,100
$190,751 – $364,200

32%
$182,101 – $231,250
$364,201 – $462,500

35%
$231,251 – $578,125
$462,501 – $693,750

37%*
Over $578,125
Over $693,750

* The top rate is effectively 40.8% for those subject to the 3.8% Medicare surtax on net investment income (those with MAGI over the thresholds of $250,000 joint filers/$200,000 single filers).

In 2022, the 24% bracket for married-joint filers topped out at $340,100. It now goes to $364,200 — an increase of $24,100. That’s $24,100 of additional income that can still be taxed at the low 24% rate. The bracket expansions are even larger for the higher tax brackets. 

More clients should be taking advantage of these brackets now because this tax party may soon end. Under the Tax Cuts and Jobs Act, these low rates are slated to end after 2025 (assuming no change in the law) and retreat to the higher pre-2018 levels.

3. Shelter More Income With 2023 Standard Deductions

The new standard deductions are:

Single: $13,850, up from $12,950 in 2022
Married filing jointly: $27,700, up from $25,900
Married filing separately: $13,850, up from $12,950
Head of household: $20,800, up from $19,400

Extra Standard Deduction for Age 65 or Blind 

Married filing jointly: $1,500 
Single or head of household: $1,850

Thanks to inflation increases, for 2023 a married couple filing jointly (if each spouse is 65 or older) can now enjoy a standard deduction topping $30,000 for the first time ever. The actual amount is $30,700. They receive the basic standard deduction of $27,700, plus each spouse receives an additional standard deduction of $1,500 for being 65 or older ($27,700 + $1,500 + $1,500 = $30,700).

More income can be sheltered this year for more clients. These larger amounts will mean that even more clients will be taking the standard deduction this year (and not itemizing their deductions).