There's a benefit to having access to a 401(k) plan for retirement savings purposes. These accounts come with much higher contributions limits than IRAs offer. And next year, those limits will get even more generous.
You can save more in 2022
Currently, 401(k)s max out at $19,500 a year for workers under the age of 50 and $26,000 a year for those 50 and over. That's because older workers get the option to make a catch-up contribution of up to $6,500.
Next year, that $19,500 limit is increasing to $20,500, so younger savers will get to sock away more money in their 401(k)s. That $6,500 catch-up limit, however, isn't changing. Workers 50 and over will be able to put up to $27,000 into their 401(k) plans.
But still, workers who max out their retirement plan contributions in 2022 could enjoy some really big tax savings. Traditional 401(k) plans are funded with pre-tax dollars, so the more you're able to contribute, the less income the IRS gets to tax you on. And if you're in a higher tax bracket, that extra $1,000 could really make a difference.
What about IRAs?
Currently, IRAs max out at $6,000 a year for workers under 50 and $7,000 a year for those 50 and older thanks to a $1,000 catch-up option. Next year, IRA limits aren't changing. That's a little surprising given the way inflation has risen this year, but so it goes.
How to max out your 401(k)
If you're hoping to build a giant nest egg for retirement, then you may be eager to max out your 401(k). But if you earn an average income, that's not an easy thing to do. Still, there are steps you can take to ramp up your savings rate:
- Save your entire 2022 raise, or as much of it as you can
- Pick up a side hustle to score some extra income
- Put any bonus cash you get your hands on (like your tax refund) into savings
- Take budget vacations instead of bigger ones
- Cut back on spending as much as you can -- even if it means ordering food delivery one time less per week
- Refinance your mortgage to lower your housing payments and stick the difference into your 401(k)
These are just some examples. Take a look at your income and spending habits and see if there's a better way for you to eke out more money for savings.
Now if you're not able to max out your 401(k) in 2022, don't beat yourself up. A lot of workers are in the same boat. At the same time, do your best to increase your savings rate as much as you can. That will help you not only grow more retirement wealth, but also reap as much tax savings as possible.
And no matter how close (or not) you get to maxing out your 401(k) next year, aim to contribute enough money to score your full employer match. Many companies that sponsor 401(k)s match worker contributions to varying degrees. It's important to set yourself up to claim that match in full, because if you don't, you'll effectively be leaving free money on the table.