How The New 2023 Increased 401(k) Contributions Can Put You In The Black

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Ah, the infamous 401(k)! If your employer offers a 401(k) as a retirement savings vehicle, you should ALWAYS take advantage. Thanks to the 401(k) contribution increase that takes place in 2023, investing in your company 401(k) is even more lucrative. This is how the new 2023 increased 401(k) contributions can put you in the black.

If your intention is to increase your savings, that’s a worthy goal. BUT don’t be short-sighted in your saving strategies. Are you looking at the long-term picture too? By that, I mean: are you contributing to your employer-sponsored 401(k) retirement plan?

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Here’s why you MUST participate in a 401(k), all thanks to the upcoming contribution increase that takes place in 2023!

Why You Should Participate in a 401(k)

If I’ve said it once, I’ve said it a thousand times: an employer-sponsored 401(k) with a match is FREE MONEY! Do not pass go! Collect your dollars by participating in this benefit.

Now, many financial gurus will suggest you should first start an emergency fund, then pay down all your debt before you even BEGIN to consider investing. I disagree… my advice is to consider investing when your employer offers a 401(k) plan with a match.

Most years, the IRS has offered a steady increase in the contribution limits (depending on the economy and other factors). Because these 401(k) contribution limits have continued to increase, it’s a particularly good time to reconsider your participation now.

The New 401(k) Contribution Increases for 2023

The IRS released a notification on October 21, 2022, that the amount individuals can contribute to their 401(k) plans in 2023 has increased to $22,500, up from $20,500 for 2022. 

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan has increased to $22,500, up from $20,500. On the latter, check with your retirement plan administrator to see if this applies to you.

So, with those pre-tax funds increasing to $22,500 in 2023, versus the previous maximum 401(k) contribution amount of $20,500, there is an added benefit to your participation. Now, $2000 might not seem like much, but in the long run, it will add up quickly.

If you’re already maxing out your 401(k) contributions, all the better! The increase gives you an automatic savings increase without lifting a finger. (Well, you’ll need to either notify your 401(k) administrator that you want to increase your current contribution amount for 2023, or go online and do it yourself).

Company Match or No Match

What if your company has a 401(k) available (or another one of the retirement account options listed above) that you could contribute to, BUT you haven’t made the jump yet? Well, first, see my recommendation above: always contribute to your 401(k) up to the company match!

If your company matches 4% of your 401(k) contribution, then you should contribute (at least) 4%. You don’t want to miss out on free money! And when your company offers a match, that’s precisely what it is!

So what should you do if, unfortunately, there isn’t a company match? Well, a 401(k) is still a great way to put away money for retirement. Your contribution is automatically deducted from your paycheck, pre-tax. You don’t need to worry about taxes until the days when you leave the workforce and start taking distributions on your account. You can invest that money now and build it up with all that interest.

Even if your company doesn’t offer a match, consider starting with a 3%-5% portion of your income. This is an excellent place to begin. It’s enough to see significant progress toward your retirement savings, but it’s not so much that you will miss it from your paycheck!

Is a $2000 401(k) Contribution Increase Really That Significant?

Back to the 2023 401(k) contribution increase. I know, I know, it’s only a $2000 annual increase. It doesn’t sound like such a big deal, but let me tell you—over time, that $2000 will add up.

Although it may not seem substantial, it really is. Think of that increase year-after-year, with all those reinvested, tax-deferred dividends being pumped into your retirement account.

Another way to look at it is this:  During 2015 – 2017, the maximum 401(k) contribution stayed stagnant at $18,000.  In 2020 and 2021 the 401(k) maximum contribution was $19,500, followed by another increase to $20,500 in 2022. Now, here we are with yet another increase in 2023. Can you see how that annual increase ultimately benefits you in the long-term?

If you’re an aggressive investor who goes all-in OR if you have a significant amount of time before you face retirement, you’ll see substantial gains with that little $2000. You decide your risk tolerance and your time frame and then work from there.

Tracking Your Investments

Are you the type of person who likes to track your investments daily? Consider taking a much smaller amount or percentage (from your overall pre-tax contribution) that you’re comfortable contributing to your retirement account. Divide that smaller amount out over 2023 but allocate it into one specific fund within your retirement account.

You’ll see just how the market works within 12 months, and it just might entice you to increase the percentage of your contribution the following year. It can be a wild-ride depending on how you react to the market on any given day—especially when it’s not such a great trading day, but you might love the experience.

Now, obviously, I don’t recommend having your entire retirement account in just one account, you should allocate your funds appropriately based on your risk tolerance and timeframe on retiring. Furthermore, your retirement account should be actively monitored by you, reviewed by a professional, and rebalanced annually if necessary (it only takes about 15 minutes to check your retirement health regularly).

Plan Today and Be Prepared for Tomorrow

Familiarize yourself with the retirement and savings options out there. It certainly doesn’t hurt to know all your choices, no matter where you are in your retirement savings (or career life).

Fidelity Investments released its Q2 2022 analysis of savings behaviors and account balances for more than 35 million IRA, 401(k), and 403(b) retirement accounts. The analysis states that average retirement account balances decreased.

The average 401(k) balance dropped to $103,800 in the quarter, down 20% from a year ago and 15% from Q1 2022. The average 403(b) account balance decreased to $93,300, down 18% from a year ago and a decrease of 13% from last quarter. The average IRA balance was $110,800 in Q2, a 17.9% decrease from Q2 2021 and a 12.8% decrease from last quarter.

Retirement Planning Calculator

For a more exact calculation, use a retirement planning calculator to help you pinpoint precisely what you will need to tuck away to live comfortably and enjoy the good life in your later years. These tools can help you plan and measure how conservative or aggressive you can afford to be with your retirement funds.

You should know the limits for individual retirement accounts as well. In 2023 you will be able to save up to $6,500 in your IRA, up from $6,000 in 2022. Again, only $500 more annually, but it really does add up.

You can save for retirement using both an IRA and a 401(k), so be sure you understand the difference and know the maximum contributions for both retirement planning options. You have plenty of ways you can save for retirement!

Catch-Up Contributions if You’re Age 50 or Older

Now, if you are 50 and over (like yours truly) and looking to make up for lost time, catch-up contribution limits also increased. For 401(k) and other employer-sponsored retirement plans, you can put in an additional $7,500 in 2023. For IRAs, you can put in an additional $1,000.

If you’re age 50 or older, and you want to maximize your contributions; check these numbers out:

  • $22,500    2023 401(k) Maximum Contribution Limit
  • $7,500      401(k) Catch-up Contribution (if you’re age 50 or older)
  • $6,500      2023 IRA Maximum Contribution Limit
  • $1,000      IRA Catch-up Contribution (if you’re age 50 or older)

By utilizing these tax-advantaged accounts for 2023, you are investing $37,500, which can help you feel more confident about a secure future.  

Feeling Confident About a Secure Financial Future

Saving for retirement may not sound sexy or fun, but with free money and the 401(k) contribution increase, you have to admit it’s a little exciting! Don’t wait to invest. Saving for retirement is the new black in 2023, to get YOU in the black for your retirement!

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