Defined contribution retirement plans, like 401(k)s, are a key component of many Americans’ retirement strategy. These plans offer an easy, tax efficient way to save for retirement and grow your nest egg. A 401(k) plan can even help lower your tax bill each year. With all these benefits, it makes sense to maximize your 401(k) contributions.
The IRS caps the amount that you can contribute to a 401(k) each year. For 2023, the maximum 401(k) contribution will increase. Most plans do not automatically adjust to changing limits, so it’s important to incorporate the new, higher limit into your financial plan as soon as possible.
401(k) Contribution Limits in 2023
For 2023, you can deposit up to $22,500 in your 401(k). This is a $2,000 increase from 2022’s limit of $20,500.
Many employers also contribute to 401(k) plans and those contributions are limited as well. The total allowable contribution – which includes your deposits, employer matching, and employer profit-sharing contributions – to a 401(k) will increase to $66,000 in 2023. This is a $5,000 increase from 2022’s limit of $61,000.
For those 50 or older, you can contribute even more to a 401(k) plan. These additional salary deferrals are called “catch-up contributions” because they allow you to “catch up” as you near retirement. For 2023, the allowable catch-up contribution will increase to $7,500 – a $1,000 increase from 2022’s limit of $6,500.
See below for a table of next year’s contribution limits.
Steps to Take Now to Maximize Your 401(k) in 2023
To maximize the effectiveness of your 401(k) next year, take the following actions as soon as possible.
1. Update Your Financial Plan
Be sure to update your financial plan to account for the new 401(k) contribution limits for 2023. An accurate estimate of your retirement contributions can be integral to a successful retirement plan.
2. Increase Your Contributions ASAP
There’s a strong chance that your plan won’t increase automatically to account for the higher limits – even if you’re already contributing the maximum amount. Instead, most workers will need to make the change manually. Do this as soon as possible to ensure your monthly contributions are maximized for 2023.
3. If You Aren’t Already, Maximize Your Employer Match
If contributing the maximum amount to your 401(k) doesn’t fit into your budget, consider contributing at least enough to get the full employer match. Employer matching contributions can help your retirement savings grow faster than relying solely on your own contributions and investment returns.
Most employers match between 3% and 5% of contributions, but their methods for calculating this match can vary. For example, some employers match 50% of contributions up to the stated limit while others match dollar-for-dollar.
Keep in mind that some employers only match during the months that you make contributions. This means that front-loading your 401(k) deposits in the first months of the year could lead to forfeited matching contributions for the rest of the year.
4. Speak to an Experienced Financial Advisor
Managing your 401(k) alone can be difficult. You must decide the optimal amount to save each pay period, maximize employer match, choose appropriate investments, and determine how your 401(k) fits into your overall financial plan. An experienced financial advisor can help with all these tasks.
A trusted financial partner can quantify your retirement goals and determine the appropriate steps to reach them. Then, they can help you choose investments, decide how much to contribute, and maximize employer match. Finally, an effective advisor will support you as you manage the daily decisions that will keep you on the path to retirement success.
Review your 401(k) with the Experienced Advisors at Meld Financial
At Meld, our team of tax, legal, and financial professionals will develop your Financial Fingerprint™ – a comprehensive wealth management plan that is quick to assemble, easy to understand, and simple to modify as your circumstances change. Your Financial Fingerprint™ considers all retirement accounts – including your 401(k) – to create a plan designed to meet your savings and retirement goals.
With Financial Fingerprint™, and an ongoing relationship with an experienced financial advisor, you can rest assured that you have a plan to maximize 401(k) contributions and achieve your retirement goals. Contact us today to get started.