Building a nest egg is an important thing to do if you want to retire in a comfortable manner. Sure, you can tell yourself you'll just fall back on Social Security -- but doing so might lead to a serious income shortfall down the line.
Now when it comes to saving for retirement, you have options. If your employer sponsors a 401(k) plan, it could pay to contribute. That's because many of the companies that offer these plans also match worker contributions to some degree. Plus, 401(k)s come with generous contribution limits, so if you're able to allocate a sizable chunk of your income to retirement savings, you have a solid opportunity.
But not everyone has access to a 401(k). Maybe you work for a company that doesn't offer one. Or maybe you're self-employed, and so it's on you to fund your retirement savings without the help of a company match.
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If that's the case, the good news is that you can do quite well for yourself saving in an IRA. And next year, the annual contribution limits for IRAs will be rising, so you'll have an even greater opportunity to sock funds away for retirement -- and enjoy some tax breaks along the way.
You can save more in your IRA next year
In 2022, the annual contribution limit for 401(k) plans rose by $1,000. But the contribution limit for IRAs stayed the same as it was in 2021 -- $6,000 for workers under age 50, and $7,000 for those 50 and over.
Next year, the annual IRA contribution limit will rise from $6,000 for savers under 50 to $6,500. The catch-up limit, however, will hold steady at $1,000, which means savers 50 and older can put up to $7,500 into an IRA in 2023.
Now interestingly, the IRS just announced that catch-up contributions for older 401(k) savers will be increasing from $6,500 to $7,500. Unfortunately, IRA catch-ups aren't subject to cost-of-living adjustments, so those will be staying where they are. But either way, if you're able to max out your IRA in 2023, it pays to do so. The more money you save in the near term, the more you stand to retire with.
It pays to snag that tax break
Retiring with a solid nest egg isn't the only reason to try to max out your IRA next year. You should also aim to take advantage of the chance to snag a big tax break.
Traditional IRA contributions go in tax-free, so if you manage to put $6,500 into your IRA next year, that's $6,500 of income the IRS won't tax you on. Now if you decide to fund a Roth IRA, you won't get that immediate tax break. But you will get to enjoy tax-free investment gains in your retirement plan, plus tax-free withdrawals once retirement rolls around.
Plus, Roth IRAs are the only tax-advantaged retirement plan that doesn't subject savers to required minimum distributions. This means you get a lot more say over your savings -- and the option to continue benefiting from tax-advantaged growth well into your later years.
