Financial Planning Fridays #22: 2023 Contribution Limits

Today we wanted to discuss the best ways to maximize your retirement accounts using the new IRS limits for 2023.

These are the largest contribution increases in history and will allow you to save more than you ever could before. Saving into these types of accounts are some of the best ways to make investments each year because of their many tax advantages.

We created a one page document highlighting the 2023 tax brackets, contribution limits for various retirement accounts, and the current gift and estate tax exemption amounts that you can download from our website.

While the numbers are important to know, we also identified a few ways our clients can maximize these higher IRS limits.

As many are aware, the IRS limit for salary deferrals in 2023 is $22,500 for pre-tax and Roth 401k contributions.

What most people are unaware of is that many retirement plans also allow you to choose “after-tax” contributions, alongside your pre-tax and Roth contributions.

This matters because the IRS contribution limit for all contributions this year, including your employer match, is much higher at $66,000. This means that on top of a maximum contribution, one could contribute an additional $30,000, or more, to their 401k, well above the IRA contribution limits of $6,500.

When reviewing your plan and making this decision, it’s important to have a good understanding of how to allocate your contributions to each bucket as this can impact your cash flow month to month, and also throughout the year.

We are happy to assist you in deciding the right percentage for each avenue available within your 401k to ensure you are well positioned to achieve the maximum current and long-term tax advantage.

The second area worth considering, if you are eligible, is a Roth IRA contribution. If so, this is a great avenue to build up what will eventually be tax-free income in retirement.

If you are not eligible, and your income is above the IRS threshold, you may want to consider contributing to a regular IRA instead and immediately converting it to a Roth IRA, known as a Roth Conversion [plug who may be a good candidate?].

Finally, and perhaps the most impactful action that you can take is to contribute as much as possible as early as possible to these tax-advantaged plans. It’s important that your family members and friends do as well.

Only 41% of Americans contribute to a 401k, according to the U.S. Census bureau. And, because most people no longer have access to a pension anymore, 401k’s are often the only retirement vehicle we have access to, making saving into these types of tax-advantaged accounts more important than ever.

When it comes to these accounts, it is all about getting started – the earlier, the better. A 30 year old today who is able to save the maximum pre-tax or Roth contribution each year to their 401k, with no company match, and have it grow at 10% per year, will have more than $9 Million at age 65! If they instead begin this at age 40, they would have about half that. And, if they wait until age 50, they would only have a quarter of that. This truly can have an outsized impact on one’s financial future.

Show chart here

Please share this with a friend or family member. The impact that beginning to save earlier can have for them will pay off in the future.

In Financial Planning Fridays episode #20, we went over a few of the reasons we are so optimistic for a market recovery this year. One of the best ways to take full advantage of a down market, and more completely participate in better markets, is to maximize the contributions in your retirement accounts.

Please feel free to call or e-mail us if we can help in any way.

Thank you and we hope that 2023 is your best year yet!

Be on the lookout for our next Financial Planning Fridays episode. Subscribe to our Youtube Channel so you never miss an episode. Or contact us directly; schedule your 15-minute call with us today.