If your long-term goal in life is to enjoy a comfortable retirement, a solid 401(k) plan is one of the best ways to get there.
And, with the Internal Revenue Service (IRS) increasing the amount of pretax money you can contribute to your retirement next year, it is a no-brainer for millions of working Americans.
"For 401(k) plans, participant's can contribute up to $22,500 pre-tax [up $2,000 from $20,500]," Lisa Featherngill, National Director of Wealth Planning at Comerica Bank told Newsweek.
"For individuals age 50 and older, the make-up contribution increased to $7,500 (from $6,500). Thus, individuals age 50 and older can contribute up to $30,000 next year to this type of plan."
You can take full advantage of the higher contribution limit by aiming to add around $160 extra per month to your 401(k) plan beginning in 2023.
Plans affected by the change in contributions include: 403 (b); Select 457 plans; Thrift Savings Plan; Employee catch-up contributions; and IRAs.
Meanwhile, the maximum annual contributions between employees and employers is expected to increase from $61,000 to $66,000 next year.
Featherngill explained: "The contribution is actuarially calculated based on the pension benefit and the participant's age.
"The maximum pension benefit for purposes of the contribution calculation is increasing from $245,000 to $265,000. A significant jump.
"Finally, when employers make contributions to certain plans as a percentage of the employee's compensation, the IRS places a cap on the amount of compensation that can be considered for qualified plans.
"That number will increase from $305,000 to $330,000."
Additionally, low and moderate income retirement savers can earn up to $5,000 more, while still qualifying for the saver's credit, which could be worth as much as $1,000 for individuals and $2,000 for couples.
The income limit for the saver's credit will increase to $36,500 for individuals, $54,750 for heads of household and $73,000 for married couples in 2023.
Around 60 million Americans are said to be actively contributing to a 401(k) plan, according to the Investment Company Institute, an association of regulated investment funds.
And, the data released last month by the Bureau of Labor Statistics showed that just over half of all private industry workers contribute solely to their employers defined contribution retirement plans.
The idea behind these changes is to ease the growing burden of living costs on consumers amid rampant inflation, and follows what experts deem an all-but-inevitable recession.
The changes overall are part of a group of cost-of-living adjustments, or COLAs, the federal government have been announcing.
The announcements include the largest COLA adjustment for Social Security since 1981 and a seven percent shift upward in the income tax brackets that determine how much money the federal government gets out of your paycheck.
Uncommon Knowledge
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
About the writer
Emilia Shovelin is Newsweek's Personal Finance Reporter based in London, UK. Her focus is reporting on U.S. personal finance, property ... Read more
