If you're trying to pump up your retirement portfolio in 2023, your employer-sponsored 401(k) plan could do the trick. You can tuck away more money in your 401(k) thanks to the inflation-adjusted contribution limits released by the IRS. And for retirement savers over 50, the contribution limits are even sweeter.
Understanding how 401(k) contributions work could easily make your head spin if you're just getting started. We'll break down the basics so you can take advantage of your company's 401(k) before it's too late.
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Breaking down your company's 401(k) plan
A 401(k) is one of the most popular workplace benefits you might receive. It's an employer-sponsored plan that can boost your retirement savings and lower your tax bill. You can make pretax contributions from your paycheck to fund a traditional 401(k).
Let's say you earned $100,000 in 2022. If you contributed the maximum elective deferral amount ($20,500) to your 401(k) that year, you'd only pay taxes on the remaining $79,500. Plus, you don't have to pay taxes immediately on the interest, dividends, and profits you earn in your 401(k) every year. You can defer your tax bill until you start withdrawing the money.
If the tax perks sound appealing, you should check your company's 401(k) documents to learn more about the following:
- Investment options
- Fees
- Vesting schedules
By contributing money to your 401(k), you may be able to unlock additional dollars from your employer to fund your retirement pot. This is known as an employer match, and it's usually capped at a certain percentage of your salary.
Increase your contributions in 2023
If you want to beef up your retirement portfolio, you can stash more cash away in your 401(k) in 2023.
The IRS increased the elective deferral limits from 2022 to 2023 for employee contributions. Qualified retirement savers can contribute up to $22,500 from their paycheck to their 401(k), up from $20,500 in 2022. If you're 50 or over, you can add another $7,500 to your retirement portfolio. This catch-up contribution means you can set aside up to $30,000 in your 401(k) if you meet the age requirements.
You should also take note of the cap on all 401(k) contributions made in 2023. If you and your employer contribute to your 401(k), the total contributions can't exceed $66,000, up from $61,000 in 2022. For savers 50 and over, the total contribution limit rises to $73,500.
If you are considered a highly compensated employee, you should check with your employer to confirm your 401(k) contribution limits.
Create your 401(k) game plan
If you're excited about the latest contribution limits, it's a great idea to do your research and create a game plan. You have until Dec. 31 to contribute money from your paycheck to your 401(k) for 2023. After your window of opportunity expires, you won't be able to make up for it later.
Here are a few steps you can take to maximize your 401(k) contribution:
- Develop your goals. Review the contribution limits and determine how much you want to contribute to your account.
- Create a plan. Calculate how much money you need to contribute to your 401(k) every month to achieve your goal. You can contribute equal amounts every month or change your contribution amount during the year.
- Find extra money. Ask your company's human resources department if your company offers an employer match. If they do, find out the rules and how it works.
- Be clear about your long-term goals. Review your action plan and make sure what you are doing now will get you closer to the type of retirement lifestyle you seek later.
Enjoy the best 401(k) contribution limits
The new 401(k) contribution limits make it easier to increase your retirement savings this year. Review your goals, do your research, and set your contribution goals. Now is a great time to put your 401(k) to work so you can get closer to the financial freedom you seek during retirement.
