The IRS raised the retirement savings limit in 2023, but even very few people hit it. Here’s what you can do about it.

Most of the news on Inflation was badbut retirement savers may have been given a layer of silver – if they were savers and if they could afford to take advantage of it.

The IRS raised last month a record amount on the limit on how much people can accumulate in retirement accounts on a tax-deferred basis, largely due to soaring inflation.

But here’s the truth: Only 14% of employees who participated in a corporate retirement plan last year contributed to the IRS limit, according to Vanguard.

add four-decade high inflationand 54% of 1,000 Americans surveyed by Allianz Life in September said they have stopped or reduced their retirement savings.

And that’s even as people’s expectations grow for how much money they need to retire comfortably ($1.25 million today, according to a recent Northwestern Mutual survey, up 20% from compared to last year), people are saving less.

“I think what’s coming is going to take advantage of the new limits, but that’s only a fraction of the contributors,” said Kelly LaVigne, vice president of consumer insights at Allianz Life. into a retirement plan.

But that doesn’t happen if people follow the steps of budgeting and saving, they can also move towards tax-free income growth.

What are the 2023 401(k) limits?

In 2023, employees participating in the company’s retirement plan can contribute $22,500 to their 401(k), up $2,000 from last year. Those not participating in an employee-sponsored plan will be able to contribute $6,500, up from $6,000, into an individual retirement account (IRA).

Besides, catching up contribution the limit for employees 50 and older is increasing to $7,500 in 2023, up from $6,500 in 2022. That means participants will be able to contribute up to $30,000 in total. . The IRA catch-up contribution limit will remain at $1,000, the IRS said.

What is a 401(k) and an IRA, and what’s the difference?

A 401(k) is a retirement savings plan offered by companies to employees. Many companies are also suitable, which means they will contribute an amount equal to what you would do in retirement, often up to a certain amount. Only your contributions count towards the IRS limit, so matching can increase your total savings past the IRS limit, and that’s what advisors call it. “free money.” So at least contribute enough to get the full match, if you can, the advisors say.

Contributions are deducted from your paycheck before taxes, thus reducing your taxable income as well. You only pay tax on withdrawals, so your money is tax-free when it’s at your 401(k).

IRAs are opened by individuals through a brokerage firm or bank. Depending on your income and filing status, all or part of your contribution may be fully or partially deductible, making this investment also tax-advantaged. Only withdrawals are taxed.

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How do people feel about retirement?

Thrilled, but still not saving properly.

Last year, nearly 70% of people surveyed by Invesco said they fear running out of money in retirement.

The survey said Americans’ average retirement savings fell 11% to $86,869 from $98,800 last year, while their expected retirement age rose to 64 from 62.6 years. last.

Why don’t people save more for retirement?

Have many reasons.

Brian Snow, who invests and saves with his BetterInvest investment club, said: “People like to live in the moment, and retirement is too far away for many to think and plan for. .

Many consumers have to move their money elsewhere, thanks to inflation,”has outstripped average hourly earnings growth and tight household budgets, and the limited ability to increase retirement savings is a by-product of that,” said Greg McBride, chief financial analyst at Bankrate.

Others lack financial know-how or discipline.

Saver Byron Williams said: “Salary isn’t ‘the only factor why people don’t hit the 401k max’.

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How do you start saving?

Starts with a budgetadvises Akari Muhisani, who noted a ‘Jesus moment’ in 2008 when she started her savings plan.

“I have $25,000 in credit card debt and don’t want to go bankrupt and have to live to pay my mother’s salary,” Muhisani said.

He begins to apply more money to his debt, the smallest balance first. In two years, Muhisani paid off his credit card balances.

Then he started saving, set aside 10% of your income for your future. He now has emergency savings about three to six months of living expenses and retirement savings. If he had money left at the end of the month, he would add more to his savings or max out his 401(k).

Williams contributes a percentage of his annual increase to his 401(k).

“Some years, I raised my full salary and set it to a 401(k), forcing me to live on the salary I lived the year before,” he said. “It’s not rocket science, it’s based on knowing the power of maxing out 401(k) and having the discipline to do it.”

Some advisors suggest Invest your tax refundalso.

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How do you increase your savings?

Invest it – soon.

“Too many people procrastinate and don’t invest early,” says Snow.

Early is the key to compoundingwhich means the income from your savings is reinvested to generate their own income, allowing for exponential growth.

If you can’t save between 12% and 15% of your recommended annual income, “save as much as you can,” says Matt Fleming, wealth advisor at Vanguard Personal Advisor Services. “Then increase your contribution by 1%-3% per year to reach your goal.”

And best of all automatic savings so they are deducted monthly from your paycheck or bank account into your 401(k) plan or other retirement fund.

“You will put money to work as you earn, giving you more time to compound growth.

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But how do you invest it?

Investing can be difficult with so many numbers, options, and tax consequences. Some people turn to Financial Advisor. Muhisani joins an investment club.

“Investment clubs are a great place to meet everyday people, retirees do this – man, they are very smart and they have never studied this before,” he said. Note that the Beardstown Ladies club inspired him. “They are the women who regularly invest in the markets and have always been the subject of CNBC’s investment challenge.”

There, he said, he learned about the company’s financial statements, valuations, funds, fees, retirement funds and more, and split his savings into about $1 million in total pension amount.

Education would be the first step, Williams said. “Make sure people really understand the 401(k), its benefits, and how to take advantage of it is key.”

Medora Lee is a currency, markets, and personal finance reporter at USA TODAY. You can reach her at [email protected] and sign up for our free Money Daily newsletter for personal finance tips and business news Monday through Friday morning. .

This article originally appeared on USA TODAY: The IRS raises retirement savings limits, but very few people reach them. Here’s how you can


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