What Do the Increased Retirement Savings Contribution Limits Mean for You?
The IRS recently announced new retirement savings contribution limits for 2023. The amount individuals can contribute to their 401(k) plans in 2023 will be $22,500 — up from $20,500 for 2022 — while the limit on annual contributions to an IRA will increase to $6,500.
Investors should take these new limits into account when it comes to their future retirement planning. Of course, how these play into your planning will depend on how close you are to retirement, plus, whether or not you can afford to make maximum contributions. Here’s a look at what these new limits could mean for you.
More Opportunities To Put Windfalls Toward Retirement
Investors of all ages can take advantage of these higher limits, particularly if they get an influx of cash that may have gone beyond 2022 limits.
“The new, higher contribution limits mean an additional opportunity for American workers to optimize retirement savings to the extent they are able,” said Julie Virta, CFP, senior financial advisor with Vanguard Personal Advisor Services. “If investors expect an inflow of cash at any given point during the year — perhaps a yearly bonus — they can allocate even more dollars to their retirement plan, up to the plan limits.”
More Compounding Power for Young Investors
Young investors who are able to contribute the maximum amount will be better off in the long run.
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“The earlier you save, the better off you’ll be due to the power of compounding returns,” Virta said. “Younger investors who are able to put more towards their retirement savings in the early years have a big tailwind to meet retirement goals, or even retire earlier.”
What if You Can’t Contribute the Maximum Amount?
Of course, many people who are early on in their careers won’t be able to contribute the maximum amounts to their retirement savings plans. For those who can’t, Virta offers the following advice: “A good rule of thumb is to save for yourself first and take advantage of what your retirement plan has to offer,” she said. “Establish a strategy, review year-to-date contributions based on retirement savings objectives and adjust accordingly.
“If you don’t know where to start, make sure you’re contributing at least enough to a company-sponsored 401(k) plan to meet an employer match, if offered, and increase 1-2% each year until you reach a recommended rate of 12-15% of your salary,” she continued. “We suggest reviewing your accounts at least annually to see if you’re on track to meet your retirement goals.”
Higher Limits for Those Nearing Retirement
The IRS allows individuals who are age 50 and older to make “catch-up” contributions to their retirement accounts.
“The 401(k) catch-up contribution amount will be $7,500 for investors age 50 or older,” Virta said.
In addition, the catch-up contribution limit for employees age 50 and over who participate in SIMPLE plans will increase to $3,500, up from $3,000. The IRA catch-up contribution limit remains $1,000.
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