The new year offers everyone the opportunity to make financial plans or resolutions they can stick to year-round. However, it can be easy to feel overwhelmed by the number of choices available. How do you know which money moves are the right ones to make?
Rather than guess what you should focus on at the start of the year, follow the tried and true advice of financial professionals. Start 2023 right by making these financial moves.
Take Advantage of Tax-Advantaged Account Contribution Increases
Tax-advantaged accounts, including 401(k) plans and traditional and Roth IRAs, are all increasing their contribution limits in 2023.
Consider taking advantage of the increases in income limits and contribution amounts this year, said David Edmisten — CFP, founder and lead advisor of Next Phase Financial Planning, LLC. As a quick reminder, Edmisten said contribution limits for 401(k) savings plans increased to $22,500 from $20,500 in 2022. Increases for IRA contribution limits are now $6,500 from $6,000 in 2022.
“Not only are the amounts you can contribute higher in 2023, but you can earn a larger amount of income and still potentially be eligible to contribute,” Edmisten said.
Additionally, Edmisten said workers ages 50 and over can add an additional catch-up contribution of up to $7,500 in 2023 to their 401(k) accounts (up from $6,500 in 2022). An extra $1,000 may be contributed to their IRA for even more savings in retirement, Edmisten said. That amount is the same for both 2022 and 2023.
Utilize Flexible Savings Accounts (FSAs)
Do you receive a flexible savings account (FSA) as an employee benefit in your workplace? Take advantage of your FSA as it allows you to use your money tax-free for eligible expenses, said Brian Mawhinney, CFP, CRPC and head of financial planning with MassMutual.
In 2023, Mawhinney said contribution limits are increasing to $3,050. Employees may also carry over up to $610 into 2024.
Keep in mind FSAs typically fall into three categories: healthcare FSAs, limited purpose FSAs and dependent care FSAs. Mawhinney said healthcare FSAs allow you to use the money for insurance deductibles, medical devices, certain prescription drugs like insulin, co-pays and more.
“Limited purpose FSAs are often designed for specific expenses related to dental and vision,” Mawhinney said. “Dependent care FSAs allow parents and caregivers to use the funds to fund child care or even elder care costs.”
Review Cash Savings Accounts
At the beginning of 2023, Edmisten recommends consumers review their cash savings accounts. Start looking for ways to increase the amount of interest you earn.
“Many people continue to hold large amounts of savings in a regular savings account at a large retail bank,” Edmisten said. “Interest rates in a regular savings account are much lower than other options. Online high yield savings accounts are around 3%, and CDs and Treasury bills are paying even more. Consumers can increase their interest income by considering higher earning options for their cash accounts.”
If one of your 2023 resolutions is to invest, start now.
As an example, Daken Vanderburg, CFA and chief investment officer at The MassMutual Trust Company, said to imagine two investors named Kevin and Kim. They each invested $100,000 total and both earned the same interest rate. Yet, Kim ends up with $4.5 million more than Kevin.
How did this happen? Vanderburg said Kevin begins investing when he turns age 30. He has $100,000 saved and earns 10% per year through investing without ever investing another dollar. By the time he retires at 65, Vanderburg said he has a sum of $2.8 million.
Kim, Vanderburg said, understands the power of investing and compounding interest in her early years, and figures out a way to invest the same $100,000. Instead of starting at age 30, Kim starts investing at age 20.
“That’s it. No other difference from Kevin. She also earns 10% per year, and does not contribute another dollar. At age 65, Kim has nearly $7.3 million,” Vanderburg said.” That is the phenomenal power of compounded interest.”
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