A new year means a fresh start for making contributions to your 401(k) plan. Kiplinger notes that, if your employer offers one, a 401(k) "is one of the best and most tax-friendly ways to build a nest egg." In other words, it makes sense to contribute as much to your 401(k) plan as is financially possible for you. The good news is that 401(k) contribution limits are up by a lot for 2023. Here's what you need to know:
What are 401(k) contribution limits for 2023?
In 2023, workers can contribute up to $22,500 to their 401(k) plans, marking a $2,000 increase from 2022. Plus, those who are age 50 or older can make catch-up contributions. In 2023, the limit for catch-up contributions is $7,500 (a $1,000 increase from the year before), allowing employees in this age group to contribute up to a grand total of $30,000 this year.
Kiplinger reports that asset management firm Mercer has highlighted that these are record jumps in contribution limits, "eclipsing last year's increases, which were the second highest at the time." The reason? Inflation. "A lot of these adjustments have been larger than we've seen in a long time because of higher inflation," Anqi Chen, a senior research economist at the Center for Retirement Research at Boston College, told The New York Times.
How much should you contribute to retirement savings?
It's recommended that you save at least 15 percent of your income for retirement, a figure that includes any employer match that you receive. So, for instance, if your employer contributes 3 percent to your 401(k) plan, then you would need to contribute 12 percent to bring the total to the recommended 15 percent.
If you don't currently save the maximum — or even the recommended 15 percent — you're far from alone. But that doesn't mean that it's too late to start trying to save more. Kiplinger suggests trying to up your contribution each year until you've hit the 15 percent mark. For instance, you might bump your current 3 percent contribution rate up to 5 percent in 2023, and then 7 percent in 2024, and so forth, until you hit 15 percent. It might even be possible to automate this increase, as companies sometimes will automatically raise the percentage you contribute each year.
Make sure to contribute enough to get your full employer match. In some cases, employers will offer to match your contributions up to a certain amount, which is effectively free money that you won't want to walk away from.
Are there any upcoming changes to retirement plans to know about?
Aside from the nearly 10 percent jump in contribution limits for 2023, there are other retirement plan-related changes on the horizon.
Catch-up limits are set to become higher for those aged 60 and older, thanks to legislation that passed in Congress in December 2022. While there are already increased contribution limits for those aged 50 and older, this new legislation would allow people between the ages of 60 and 63 to make an additional $10,000 in catch-up contributions. After that, "[f]or 65-year-olds and beyond, it's back to the regular catch-up contribution limits," SmartAsset reports. This change is set to take effect in 2025, if signed into law by President Biden.
Other notable potential changes this piece of legislation, called the SECURE 2.0 Act, could bring include higher age requirements for required minimum distributions (RMDs), automatic 401(k) enrollment, and more modest 401(k) eligibility requirements for part-time employees, Forbes reports.
When can you take money out of your 401(k)?
Ideally, you won't touch the money in your 401(k) until you've retired. But, if you're approaching that age, here's what you need to know: You typically must be at least 59 ½ years old to take money out of your 401(k) plan without paying the 10 percent early-withdrawal penalty. An exception to this rule, however, is if you are at least 55 years old when you leave your employer.
Outside of the above age constraints, there are a couple other instances when you can withdraw funds from your 401(k) penalty free. This includes hardship withdrawals, which the IRS describes as "due to an immediate and heavy financial need," such as unreimbursed medical expenses, payments needed to prevent eviction, or the down payment to purchase a principal residence, Bankrate explains. It's also possible to take out a 401(k) loan. In either scenario, remember, your withdrawals are subject to income tax.
Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She has previously served as the managing editor for investing and savings content at LendingTree, an editor at SmartAsset and a staff writer for The Week. This article is in part based on information first published on The Week's sister site, Kiplinger.com
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