If you want to get a head start on your 401(k) contribution plans for 2023, now is a good time to get the ball rolling. The IRS just announced the 401(k) contribution limits for 2023, and they are higher than ever, making it easier for you to invest and get closer to your retirement goals.
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How higher 401(k) contribution limits help you
A 401(k) is an employer-sponsored retirement account that can help you tap into your best life during retirement. If you've been on the fence about opening a 401(k) or contributing to one you already have, here are some benefits that may cause you to have a change of heart:
- Tax advantages: The more money you contribute to a 401(k) in 2023, the less money you'll have to pay taxes on when April 15, 2024, rolls around.
- Retirement growth: A 401(k) allows you to route funds directly from your paycheck into a retirement account. To encourage that, your employer may offer to match some of your contributions, giving you an instant boost to your nest egg.
- Higher annual contribution limits: You can contribute more money per year to a 401(k) than you can to other tax-advantaged accounts such as a traditional Individual Retirement Account or a Roth IRA.
Thanks to the latest inflation adjustment to the 401(k) contribution limits, you can direct up to $22,500 to your 401(k) next year. That's up from $20,500 in 2022 and $19,500 in 2021.
If you'll be 50 or over at the end of the calendar year, the limit will be even higher. Those older employees can make "catch-up contributions" of up to $7,500 in 2023. In total, that adds up to a maximum of $30,000 that you could conceivably stash away in a 401(k) next year.
Take advantage of the tax advantages
If you're looking for ways to reduce your tax bill, contributing to a 401(k) may be a smart move.
Let's say you earn $100,000 in 2023. If you contribute the maximum amount to a 401(k), which is $22,500 in 2023 if you're under 50, your taxable income would drop to $77,500 -- and that's before you factor in any other tax credits and deductions you might be eligible for.
Further, you can invest the money in your 401(k) into assets offered by your employer's plan. These options typically include assets like:
Unlike a regular brokerage account, you won't have to worry about paying taxes every year on the interest, dividends, and profits your investments may earn. With a 401(k), you won't owe taxes on either your contributions or earnings until you withdraw the money.
Boost your retirement savings in 2023
If you haven't been able to invest a ton of money for retirement so far, this is the time to start focusing on the future. Map out your goals, review your financial situation, and put a 401(k) game plan into motion. Don't feel pressured to contribute the maximum amount, of course. But calculate what you can dedicate to your 401(k), set those contributions to be automatically deducted from your paychecks before they even hit your bank account, and you'll put yourself on a better course toward achieving your retirement goals.
