The IRS announced they are raising the contribution limits on 401(k)s and IRAs in 2023. Here’s what you need to know.
The hike in contributions limits is the result of inflation and cost-of-living adjustments. This change has come at the perfect time, with the federal government recently announcing we’ve hit the highest inflation rate in four decades.
These changes raise the question, should you maximize your 401(k) or IRA contributions in 2023?
401(k) Contribution Limits
Next year the annual contribution limit for 401(k)s will be $22,500. Additionally, individuals above the age of 50 will also be eligible for catch-up contributions for up to $7,500. In total, employees above the age of 50 can contribute up to $30,000 to their 401(k). For employers that offer match programs, the total annual limit is now up to $66,000.
IRA Contribution Limits
For those who have a retirement fund outside of their employers, annual contribution limits have also increased for both traditional IRAs and Roth IRAs. In 2023, individuals can contribute up to $6,500 to their IRAs. However, catch-up contributions have not been raised for IRAs.
Roth IRAs do have income limits, so individuals making above a specific threshold are eligible for reduced contributions. Additionally, individuals who make above the upper range of that threshold are not eligible at all. In 2023, the income phase-out range for single filers is $138,000 to $153,000. For married couples filing jointly, the range is $218,000 to $228,000.
How much should I be contributing to my 401(k) or IRA?
When the annual contribution limit rises, many feel pressured to put more money into their retirement savings. If you’re wondering if you should be contributing more to your 401(k) or IRA, it really depends on your financial situation and what your employer might offer. For instance, if your employer offers a contribution match, your goal should be to contribute enough to earn the match. Not taking advantage of the match is basically like losing out on free money.
If you contribute enough to earn the match, and still have additional funds you wish to invest, you may want to consider opening a Roth IRA, due to the tax benefits these accounts offer. With Roth IRAs, contributions are taxed up front, so you won’t get taxed on investment gains when you take the distributions in retirement.
It’s a basic rule of thumb that 10 – 15% of your income should go toward your retirement fund, but it’s not a one-size-fits-all answer. It ultimately depends on when you start saving, how much you earn annually and your current financial situation.
Final Thoughts
The bottom line is you should only contribute as much as you can afford, no matter what the limits are. Oftentimes, it’s best to consult a financial professional to ensure you’re making the best financial decisions for your situation. If you’re interested in getting started on building a strong retirement plan, APO Financial can help. No matter where you are in your financial journey, we can create a plan tailored just to you.
Schedule a call with us today to get started so your retirement can be as fulfilling as you want it to be.
© 2022 APO Financial. All rights reserved. Disclosure: Communications such as this are not impartial and are provided in connection with advertising and marketing. This material is not suggesting a specific course of action or any action at all.. Prior to making any investment, insurance, financial or legal decision, you should always seek individualized advice from a financial, insurance, legal or tax professional that takes into account all of the particular facts and circumstances of your individual own situation Investment advice is offered through APO Financial Services, LLC (“APO") 10155 Westmoor Drive, Suite 175, Westminster, Colorado 80021-2627, an investment adviser registered with the Securities and Exchange Commission. Registration with the SEC should not be construed to imply that the SEC has approved or endorsed qualifications or the services offered or that its personnel possess a particular level of skill, expertise or training. Important information and disclosures related to APO are available at https://apofinancial1.wpengine.com. Additional information pertaining to APO’s registration status, its business operations, services and fees, and its current written disclosure statement is available on the SEC’s investment adviser public website at https://www.adviserinfo.sec.gov. Information relating to annuities is intended for educational purposes only and should not be construed as comprehensive or all-inclusive. Therefore, it should not be regarded as a complete analysis of the subjects discussed and should not be used to make an investment decision. Annuities can be an important part of an overall portfolio but may not be appropriate for everyone. Before purchasing an annuity, it is important to understand the details of the product. Certain products may not be available in your state. The terms of each indexed annuity varies. It is always important to speak to a financial professional. about an annuity’s features, benefits and fees, and whether an annuity is appropriate for you, based on your financial situation and objectives. Participation rates, cap rates and/or index spreads may be subject to change by the insurance company according to the annuity contract provisions. If the insurance company makes such changes, this could adversely affect the return. Guarantees of an indexed annuity are backed by the claims-paying ability of the underwriting insurance company. The surrender charge period for a product may be longer, and the surrender charges may be higher than other annuity products. Indexed annuities are long-term investments. If the annuity contract is surrendered early, there is the possibility of a surrender charge being imposed and/or the funds may be subject to income taxes. The IRS may also impose a 10% penalty on withdrawals prior to age 59 ½, depending on the circumstances. With indexed annuities, there is the potential to lose money, depending on the product charges and minimum guarantee contract provisions. For additional information on annuities, reference the following websites: The FINRA (www.FINRA.org), the Securities and Exchange Commission (www.SEC.gov), Insured Retirement Institute (www.irionline.org), the National Association of Insurance Commissioners (www.NAIC.org) or your stat