It's been a tough year for workers. Between falling stock prices and surging inflation, it's even more challenging to save for retirement -- and many workers are feeling the pinch.
The good news is that big changes are coming in 2023 for retirees and workers that will make it a little easier to weather these challenging times. Social Security beneficiaries will see a record-breaking benefit increase next year, for example, to help fight inflation.
Workers currently saving for retirement can also expect a historic change for 2023 when it comes to 401(k) and IRA contribution limits. Here's how it could affect your savings.
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The IRS is dramatically increasing contribution limits
Most years, the IRS increases the amount that workers are allowed to save in their retirement accounts. Generally, these contribution-limit increases are minimal, and in some years, there's no adjustment at all.
Because inflation has been soaring throughout 2022, however, next-year's contribution-limit increase will be much larger than usual.
Currently, you can save up to $20,500 per year in a 401(k) and $6,000 per year in an IRA. Starting in 2023, though, you'll be able to contribute up to $22,500 per year to your 401(k) and $6,500 per year to your IRA.
| Year | Contribution Limits for 401(k)s | Contribution Limits for IRAs |
|---|---|---|
| 2022 | $20,500 per year | $6,000 per year |
| 2023 | $22,500 per year | $6,500 per year |
Data source: IRS.
While that may not sound like much, it's the largest single-year increase since the IRS began adjusting contribution limits for inflation back in 2007.
What this means for your savings
Not only does a higher contribution limit allow you to save more for retirement each year, but it could also result in a lower tax bill. Some retirement plans -- such as 401(k)s and traditional IRAs -- are tax-deferred, meaning you get a tax deduction on your initial contributions. The more you contribute to these types of accounts, the more you can potentially save on your taxes.
Also, saving even a few hundred dollars more per year can go a long way toward building a robust nest egg. For example, say you're already maxing out your IRA by saving $6,000 per year, and starting in 2023, you begin saving the full $6,500 per year. Assuming you're earning a modest 8% average annual return on your investments, that extra $500 per year can add up to more than $23,000 after 20 years.
If you continue increasing your contributions each year, you could potentially earn significantly more.
Building a stronger retirement fund
Next-year's record-breaking contribution-limit increase is a good thing for workers. If you're able to max out your 401(k) or IRA, these higher limits can boost your savings by tens of thousands of dollars over time.
Even if you can't afford to max out your retirement account, though, saving even a little more can go a long way. While that's easier said than done, there are a few tactics that can help increase your savings:
- Set your savings on autopilot: If you're saving in a 401(k), you may be able to set up recurring contributions so that a set amount of money is transferred from each paycheck straight to your 401(k). For an IRA, you could set up regular transfers from your bank account to your retirement account, making it easier to make saving a priority.
- Start small: You don't have to contribute hundreds of dollars per month to see a noticeable difference in your savings. Putting even a little money away is better than saving nothing, and no amount is too small to get started.
- Take advantage of matching contributions: Some employers offer a matching 401(k) contribution, which is essentially free money. Depending on your plan, you could potentially earn thousands of dollars per year in matching contributions. If your employer offers this perk, it's wise to take full advantage of it.
Saving for retirement is never easy, but the tough economic conditions workers are facing this year have made it even more challenging. Higher contribution limits can help pad your retirement fund a little more, and by saving as much as you can afford, it will be easier to build a healthy nest egg.
