As we approach the end of the year, now is a great time to ensure you’re getting the most out of your 401(k) plan. There are several opportunities to expand your savings, potentially minimize your taxes, and set yourself up for success in 2023.
What is a 401(k)?
The 401(k) is the most popular type of retirement program offered through an employer. A traditional 401(k) is a type of defined contribution retirement savings plan, which means that employees decide how much to contribute to their account, and contributions are taken out of their paychecks before income taxes are calculated, giving them immediate tax savings. Alternatively, employees can save using a Roth, on an after-tax basis, with the idea that they’ll save on taxes when withdrawing down the road.
Once in the plan, 401(k) contributions can be invested in a mix of stocks, bonds, and cash, often through mutual funds or ETFs. These accounts, aimed toward long-term investing, tend to grow in value over time due to compounding earnings (when your money starts to make money), and employees are generally able to access the funds without penalty when they reach the age of 59½.
2022 max 401(k) contributions and deadlines
The maximum amount an employee can contribute to their 401(k) in 2022 is $20,500. Employees aged 50 years or older are able to contribute an additional $6,500 to their plan in the form of a catch-up contribution. Remember that unlike an IRA, employees must make contributions by Dec. 31 through their payroll. There is not generally a way to make 2022 deposits after the year ends. (IRAs can be funded up until April 15 and can be funded directly from checking and savings accounts.)
Read: The secret to a happier retirement might be in your ‘retirement quotient’
Ways to increase your retirement saving
To ensure you have enough saved for retirement, it’s important to review how much you can contribute to your 401(k) annually and consider how to maximize these savings. Choosing a savings rate by a rule of thumb, like 10-15% of your salary, is a great place to start, but as you get further into your savings journey, you’ll want to consider checking in with an adviser or retirement planning tool to ensure you’re on track to meet your expectations. You can jump-start or give a boost to 401(k) savings by asking if you can defer a healthy portion of any end-of-year bonus you receive before Dec. 31, 2022.
It’s important to also make sure that you’re taking advantage of any matching contributions offered by your employer; this is a great time to connect with your employer and ensure you’re receiving the maximum amount possible for 2022, and you’re set up to make the most of the match, if applicable, next year.
Read: These are the three financial areas to sort out in the year before you retire
2023 contribution planning
The 2023 contribution limit for 401(k)s has increased to $22,500, offering employees additional room to save for their futures. Those who are age 50 and older in 2023 are able to contribute an additional $7,500 in catch-up contributions.
Prepare now by asking your employer if you have the ability to automatically set your contributions to increase each year, even better if you can time these automatic increases with your company’s typical raise timing: that way you can automatically increase your savings and still get a bump in your take-home pay. Slight increases can have a great impact on your savings, and if done over time, it will not feel as extreme as starting later in life with higher contribution rates.
Saving for retirement through a 401(k) is an excellent way to set yourself up for success and take advantage of additional funds offered through your employer. Once you’ve maxed out your 401(k) there are several other savings vehicles available for retirement, health, and education. Consider working with your employer’s retirement plan adviser to determine the best next savings options for you for this year and beyond.
Amy Ouellette is vice president at Vestwell, a digital 401(k) record-keeper.