Boosting Your 401K Contributions in 2023
Boosting Your 401K Contributions in 2023
Introduction
Whether you just started working or are nearing the end of your career, you still have the opportunity to grow your nest egg.
Due to the power of compound interest, it is true that the earlier you begin saving for retirement, the better off you may be. What’s important is that you begin saving now and that you aren’t the only person in this situation. No matter when you start saving for retirement there are steps you can take that will increase those savings.
Considering the following advice, regardless of your current financial situation, can help you increase your savings and achieve the retirement you desire.
Understanding 401K contributions
The most prevalent investment option in 401(k) plans is mutual funds, though some are beginning to offer exchange-traded funds (ETFs).
Mutual funds and ETFs hold a portfolio of securities, such as stocks.
Below is a list of strategies you might find:
A conservative fund avoids risk by investing primarily in high-quality bonds and other safe assets.
A value fund is in the middle of the risk spectrum and invests primarily in solid, stable, and undervalued companies.
Balanced Fund: A balanced fund may add a few additional risky equities to a primary value stock and safe bond portfolio, or vice versa.
Aggressive Growth Fund: An aggressive growth fund is always searching for the next Apple (AAPL) but may instead find the next Enron.
Specialized Funds: Infinite variations exist between each of the preceding. These may include specialized funds that invest in developing markets, new technologies, utilities, or pharmaceuticals.
How much should you contribute to your 401K account?
Many financial advisors will recommend having enough retirement savings plus other sources of income, such as social security or a pension, to replace 80% of your income before retirement as a rule of thumb. If you already know how much you will receive from other sources of income, you can use a conservative estimate of 5–6% annual returns from your 401(k) to determine what sort of 401(k) balance you will need to generate the additional income that will be needed to get to 80%.
Multiplying your pre-retirement income by 12 is a second straightforward method for estimating the amount of savings you will need. Therefore, if you earn $50,000 annually and are considering retirement, you should have approximately $600,000 saved in your 401(k).
Strategies to maximize your 401K savings
Don't Accept the Default Savings Rate
New employees are increasingly likely to be automatically signed up for a retirement account at work, most often by having 3% of their pay deposited in their company's 401(k) plan.
But saving 3% of your salary, while certainly better than no savings, may not be adequate to maintain your current lifestyle in retirement.
Meet your employer's match
If your employer offers to match your 401(k) contributions, make sure you can contribute at least enough to maximize the match.
For instance, an employer might offer to match 50 percent of employee contributions up to 5 percent of salary. Therefore, if you earn $50,000 annually and contribute $2,500 to your retirement plan, your employer will contribute an additional $1,250. Essentially, it's free money. Leave it not on the table.
Obtaining a 401(k) match is one of the most efficient and painless ways to increase your 401(k) balance.
Maximize Your Tax Break
Traditional 401(k) plans permit you to defer paying income tax on retirement savings. In 2022, investors can invest up to $20,500 in a 401(k) plan, an increase of $1,000 from 2021. After the age of 50, the limit increases to $27,000.
Low-income workers who save in a 401(k) plan and earn less than $34,000 for individuals, $51,000 for heads of household, and $68,000 for couples are eligible for an additional tax credit of up to $1,000 for individuals and $2,000 for couples.
Contribution limits for 401(k)s and the income threshold for the saver's credit are typically adjusted annually to account for inflation.
Diversify With a Roth 401(k)
A growing number of employers now offer a Roth 401(k) plan, in which employees can save after-tax dollars and receive tax-free distributions in retirement. Young and low-income workers who anticipate being in a higher tax bracket later in their careers stand to gain the most from a Roth 401(k), but it can also add tax diversification and flexibility to the portfolios of those closer to retirement.
Diversify Your Assets
You can minimize the risk that your 401(k) account will incur losses by selecting an appropriate mix of stock and bond funds and periodically rebalancing your portfolio to its target allocation.
But avoid making significant 401(k) investment strategy adjustments on a whim.
When to limit 401(k) contributions
In 2023, the maximum 401(k) contribution for those under age 50 will increase to $22,500 from $20,500 in 2022.
The maximum 401(k) contribution for individuals 50 and older in 2023 will be $30,000 due to an increase in the catch-up contribution to $7,500.
For 2023, your total 401(k) contributions from you and your employer cannot exceed $66,000 or 100% of your salary, whichever is less. For 2022, this amount is $61,000, or 100% of your annual salary.
The annual contribution limits for both traditional IRAs and Roth IRAs have risen for individuals with a retirement account outside of their employer. In 2023, eligible individuals can contribute up to $6,500 to their IRAs, up from $6,000.
Individuals with incomes above a certain threshold are eligible for reduced Roth IRA contributions. Individuals with incomes above the threshold's upper limit are ineligible.
The income phase-out range for single filers in 2023 is between $138,000 and $153,000. Couples filing jointly pay between $218,000 and $228,000.
Conclusion
Saving is the first step in improving the runway to retirement or financial independence. The "pay yourself first" method is the most effective, so your employer's 401(k) plan is an excellent place to invest money.
Once you can get past the financial company's literature, you may be genuinely interested in the vast array of investment opportunities that a 401(k) plan provides. You will enjoy watching your investments grow from quarter to quarter in any case.