Here’s How Much Your 401(k) Might Improve in 2023:

A 401(k) account will provide you with many valuable benefits to retirement savers. So contributing to a 401(k) plan will let you qualify for tax breaks and employer contributions. There is also a big opportunity to set up an automatic saving function and the potential for investment growth, especially in 2023.

However, you also need to avoid 401(k) fees and penalties, so you can make the most of your account. Do you want to learn how to maximize the value of your 401(k) account for the next year? Because we have a couple of useful pieces of information that you could really use! Here’s what you need to know:

Qualify for tax breaks

Did you know that you can defer income tax as much as $22,500 from what you save on a 401(k) plan in 2023? A worker in the 24% tax bracket who is able to save this amount might reduce their tax bill by $5,400. Income tax won’t be due with this amount of money until it’s withdrawn from the account.

Workers who earn less than $36,500 in 2023 ($73,000 for couples) will be able to qualify additionally for the saver’s credit, which is usually worth between 10% and 50% of 401(k) contributions up to $2,000 for individual and $4,000 for couples. However, the biggest saver’s credits usually go to workers with the lowest incomes.

Make catch-up contributions

Employees that are 50 and older are definitely eligible to make catch-up contributions to 401(k) plans. The 401(k) catch-up contribution limit will be $7,500 in 2023. Older workers are able to defer paying income tax as much as $30,000 in a 401(k) account.

A 55-year-old employee in the 24% tax bracket who decides to max out his 401(k) plan might reduce his current tax bill by $7,200. Making catch-up contributions will only help you boost your retirement account balance in the following years that lead up to your retirement. You can also defer paying income tax on your catch-up contributions, at least until you withdraw the money from the account.

Reset your automatic contributions

The majority of 401(k) contributions are instantly withheld from your paycheck and deposited in a retirement account. The 401(k) contribution limit increases by $2,000 in 2023, so make sure you try to adjust the withholding from your paychecks.

Those who want to max out their 401(k) in 2023 will have to save around $1,875 per month or $937.50 per twice-monthly paycheck. Workers that are 50 years and older might defer paying income tax as much as $2,500 per month.

Get a 401(k) match

If you’re unable to max out your 401(k), you should at least try to save enough to get a 401(k) match. A 401(k) match of 50 cents for each dollar you’ll save in the 401(k) plan up to 6% of pay is equal to a 50% return on your investment.

Even so, you need to be vested in the 401(k) plan, so you can keep your employer’s contributions to the plan, which might mean you have to stay several years on the job. Getting a 401(k) match might help you accumulate retirement savings faster.

Consider a Roth 401(k)

As traditional 401(k) plans let you defer paying income tax on your retirement savings, some employers provide an after-tax Roth 401(k) option. A Roth 401(k) won’t provide an immediate tax break, but you usually don’t have to pay income tax on the investment gains in the Roth 401(k) account, and withdrawals in retirement are usually tax-free.

A 401(k) match could be provided for Roth 401(k) contributions, but it might also be deposited in a traditional 401(k), so you’ll have pre- and post-tax accounts, from which you can withdraw in retirement.

Select low-cost funds

Each and every fund in your 401(k) plan will charge a variety of fees. No matter how your investments perform, the 401(k) fees are automatically deducted from your returns. Your plan sponsor is obliged to send you a 401(k) fee disclosure statement, that will list how much each fund you have in your 401(k) plan will cost.

You can also find out if your 401(k) plan is able to provide you with a lower-cost fund that can meet your investment needs. Selecting low-cost funds might help your retirement savings compound faster.

Avoid penalties

Make sure you pay attention to your age when you decide on the date you’ll start withdrawing your 401(k). There are some penalties that might apply if you take money out of your 401(k) account way too soon or too late. You’ll usually be charged a 10% early withdrawal penalty if you decide to initiate a 401(k) distribution before you reach 55.

There is also a 50% penalty if you can’t take the needed minimum distribution from your 401(k) plan, and pay the income tax bill, each year after you reach 72 years old. So make sure you avoid tax penalties when you take distributions from your retirement account.

Sign up for a direct deposit

Contributions to your 401(k) plan are usually withheld from your paycheck right before you even get the chance to spend the money. This is probably the fastest way to add money into your account and reduce the temptation to skip a deposit.

You could be asked to select a percentage of your salary to contribute to the 401(k) plan. A 50-year-old worker that earned $100,000 will need to contribute 22.5% of pay to a 401(k) plan, to max out the account in 2023.

Even so, if you choose a savings percentage that will let you max out your account, and then get a mid-year raise, then you might need to decrease your savings rate, so you can avoid exceeding the 401(k) contribution limit.

Increase your withholding

If you are unable to fully fund your 401(k) now, you should try to increase your savings rate when you can. As you’ll get various raises and bonuses, you should consider redirecting a part of your pay increase to your 401(k) plan.

There are some 401(k) plans that will have an automatic escalation feature, which will further increase your savings rate over time, without additional action. Even the smallest savings increase will significantly improve your retirement finances. A worker who has $50,000 per year can save 1% more ($42 per month), but also earn 7% annual returns, which in the end means an extra $71,718 after 35 years.

Don’t stick with the default savings rate

Lots of employees are usually enrolled in their workplace 401(k) plan. In this case, the default savings rate is usually 3% of pay. The low savings rate isn’t likely to produce enough nest egg for you to retire comfortably, and it will also stop you from getting the entire 401(k) match.

Make sure you choose a savings rate that will give you the needed retirement income. Lots of financial advisors would recommend saving more than 10% of your income for retirement.

Should you max out your 401(k)?

By deciding to fully fund your 401(k), you make a worthy financial goal that will only help you save more money on taxes. Even so, there are a couple of circumstances where you might have to tackle more immediate financial goals first, like creating an emergency fund or even paying down high-interest debt.

If you’re unable to max out your retirement account, you should try to save enough to get that 401(k) match. When your financial situation gets better, make sure you resume saving for retirement as soon as you can.

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