If you save money into a retirement account, like a 401(k), 457 or 403(b), you will be able to contribute more in 2023. The IRS announced a new contribution limit of $22,500 for these accounts starting next year.
That is an increase of $2,000 from the 2022 limit of $20,500.
This is important for workers who contribute to a retirement account automatically through payroll deductions.
If you are planning to max out your contributions in 2023, be sure to log into your retirement account and update the amount you are contributing to reflect this increase.
Most websites will tell you what percentage of your paycheck you have to contribute to max out. But, in case they don’t, let’s do some back-of-the-envelope numbers to demonstrate how you should handle this.
Additional Contributions to Max-Out Your Retirement Account in 2023 Calculations
If you are paid twice per month, that’s 24 paychecks. If you maxed out in 2022, ($20,500) and you want to contribute the max in 2023 an additional $2,000 will need to be taken out of your paycheck.
Over 24 paychecks that is $83.33 per paycheck. If you are paid bi-weekly (26 paychecks) that is $76.92 per paycheck. This is on top of what you are already contributing.
$22,500 over 24 paychecks = $937.50 per paycheck
$22,500 over 26 paychecks = $865.38 per paycheck
Making this adjustment as close to the start of the year as possible is a wise decision. You want to have as many paychecks to spread it out over as possible. And some payroll providers take a few weeks to implement changes.
Contributions to an Individual Retirement Account (IRA) are also set to increase $500 in 2023, from $6,000 to $6,500.
There were no changes to IRA contribution limits in 2022, so this comes as a welcome increase to those making deductible IRA contributions.
Also rising is the amount of catch-up contributions retirement savers can make. It was limited to $6,500 in 2022 and in 2023 it will increase to $7,500. Those who qualify for catch-up contributions can sock away $30,000 per year!
When we talk about compounding, the effects of it really come into play in years 50 and beyond. Especially if you are adding $30,000 per year, that’s when we see a lot of retirement account balances really take off. If you work the entire decade, that’s $300,000 you can put away for retirement. And that doesn’t include any growth.
The increase to retirement account contribution limits comes as part of a broader effort to make sure folks are able to keep up with the effects of inflation. Another part of this effort was the increase of 9.62% in monthly Social Security checks being sent out to folks.
Stocks remain the best hedge against inflation we have. While it doesn’t feel like it in a year like 2022, it is true over the long-term. Contributing more to your retirement account will allow you to have more money compounding for you. And it will also reduce your taxable income for 2023.
We always tell folks to make sure you can swing it from a cash flow perspective, before making any changes. A key point about retirement accounts is that the money is locked up until age 59 1/2. If you need access to the money before that, you will most likely incur a 10% penalty. On top of paying ordinary income tax.
You might be better off not contributing the max, and saving some of that money in a regular old savings account. Be sure to check what your savings account is yielding, because they are actually paying out yields now.
But, if you can swing it, saving that extra $2,000 will be worth it in the long run. Although it may feel like $2,000 isn’t that much money, big changes happen over time from small incremental changes.