How Increased 401(k) Contribution Limits Could Help You Retire Sooner
Everyone wants to retire comfortably with a large lump of savings that will allow them to coast into their golden years while maintaining a pre-retirement lifestyle. There are many ways to save, from stock investments to just liquid cash under the bed.
A retirement account is one of the best ways of saving. Not just one, but one of each kind offered: 401(k), 403(b), 457, and IRA. These are all different types of retirement plans that provide great and free incentives like tax deference or employer matching.
401(k) And Other Account Limits Raised
In 2023, the IRS will raise tax brackets and standard deductions across the board. So, taxpayers will see more take-home pay for millions. The US government will also increase the investment limits on various retirement accounts by a significant amount. It is a move to help combat rising inflation.
In January, the 401(k)-contribution cap will increase to $22,500, an increase of $2,000. The IRA cap will rise by $500 to $6,500 as well. Several other accounts or incentives will also be boosted to aid late starters.
Who Benefits The Most?
Unfortunately, not all incomes are created equal. Thanks to the tax adjustments, people will see more take-home income, but it won’t be enough to max out a 401(k) account. In 2021, only 14% of people reached the contributions cap.
The people who will benefit most are high-income earners. According to Fidelity’s average contribution figure, a worker under 50 must make roughly $161,000 a year to meet the cap while only contributing 14% of their income.
However, more aggressive savers who live a subtler lifestyle will find the increase more exciting. They may be able to save as much as 35% of their income, making the cap much more valuable. For someone earning only $60,000 a year, much closer to the average annual income, the additional savings move the savings meter more.
The Strength Of A 401(k)
Though high earners and aggressive savers benefit from the cap, the average person should not scoff at a 401(k). It is a tax-deferred or free account, and an increased limit means they will have more money to compound over time.
Though most people cannot meet the limit, the excitement of just a $2,000 raise should be notable. Over the short term, it doesn’t matter much. However, the additional $2,000 across decades quickly adds up to hundreds of thousands of dollars. So, if you save only $9,600 a year now and get a significant raise (or taxes are cut, wink-wink), an additional $150 a month, or $1,800 per year, would pay off well in the end.
Another strong point of the 401(k) is that it benefits diamond-handed investors the most. During economic downturns, people who sell out of their investments early at a loss usually live to regret it. A 401(k) typically offers investments in mutual funds, which are a collection of certain companies in the stock market. As such, their value can decrease when the market drops.
By not panicking and sticking to a long-term investment strategy, your money will continue to compound and increase over time. Though the stock market may drip for months or even years at a time, the annual return across the decades, since the year 1900, has been close to 10%.
While the 401(k) and IRA investment limit will only really benefit high earners and aggressive investors, many people will see benefits with these changes. The tax adjustments will put more money in people’s pockets, allowing them to live more comfortably or take advantage of the opportunity to save a bit more. And a 401(k) is an excellent place to put those savings.