Retiring with a comfortable nest egg is no easy feat. In addition to saving and investing, the tax benefits of certain savings accounts can help you achieve your financial goals faster.
Given how unstable the economy is every time there is an international conflict, a decrease in supply chain efficiency, or a new party in political power, it makes sense to seek a stable retirement plan sooner than later.
However, there are limits on contributions to these accounts based on income and other factors. Green Valley Tax Services can and will help you with a better understanding of the different retirement accounts that are best for you and your tax structure. Strategizing taxes, savings, and planning the benefits of working with us.
In this post, we'll cover everything you need to know about how 401(k)s and IRAs are changing in 2023 so that you can make informed decisions about how much money you put into each account every year when preparing for retirement.
Why is Investing Crucial for Retirement?
Investing your money, especially in a retirement account like the 401(k), is the best way to grow your assets. You need to take advantage of compound interest and ensure you're contributing enough money into your tax-deferred accounts.
Investing is crucial because Social Security and pensions are not even close to enough for people who want to retire comfortably. In the US, the average pension is about $10,788/year, and the average Social Security rests at around $1,550.48/month.
That means even in the best circumstance, you are looking at just under $30,000 per year to live, before taxes. You can't rely on either of these sources alone. If you do, then you'll probably live a very modest lifestyle. The best way around this problem is by investing responsibly so that your assets have time to grow and mature over time.
What is a 401K?
A 401(k) is an employer-sponsored retirement plan that allows you to save money for your retirement and take advantage of the tax benefits associated with such a savings plan.
The IRS defines a 401(k) as "a tax-deferred retirement savings plan authorized by section 402 of the Internal Revenue Code," which means that contributions made through your employer are not taxed until withdrawn from the account.
This means that you will not pay taxes on your contribution until you withdraw it from your account at some point in time—this could be when you retire, you reach 72 or your 401(k) may be inherited. Other rules will apply if they are inherited.
What is an IRA?
An IRA is a retirement account that allows you to invest your money and gain tax advantages. You can open an IRA with a bank or other financial institution as long as you have earned income.
There are two main types of IRAs: Traditional and Roth. In both accounts, the money that goes into them is not taxed until withdrawal. What makes the difference between them is when this taxation occurs—either when you make contributions or at withdrawal time.
How Often Should You Contribute to these Accounts?
How often you should contribute to these accounts depends on your age and income. For example, people in their twenties with a high salary may want to save more frequently than those in their fifties with a lower salary.
One thing that’s true for all taxpayers is that they should always try to save as much as they can when it comes to retirement savings—and this is especially true if the limit has been increased for the year ahead.
It’s also essential for taxpayers to consider the time horizon for their retirement savings goals. If you only have 30 years left until retirement, it would make sense (especially if your company matches your contributions) to contribute up to the annual contribution limit each year rather than saving less but contributing more frequently over time because you won't have enough time after retiring before taxes are due again.
What is Happening in 2023 to Contribution Limits?
Now for the numbers section of our article. In 2023, the IRS raised the contribution limits for both 401(k) plans and verified IRAs. This is in response to the rising inflation rate, so those preparing for retirement do not lose value on the dollar.
Currently, inflation is rising at 8.2% each year, forcing the Social Security Administration (SSA) to boost the cost-of-living adjustment to 8.7% in 2023. This means:
401(k) Contribution Limits
All 401(k), 403(b)s, and most of the 457 plans available will increase their contribution limits from $20,500 in 2022 to $22,500 in 2023. That means an extra $2,000 in eligible contributions, which should allow most people on the retirement path to catch up with the inflation rate.
IRA/Roth IRA Contribution Limits
These contribution limits have also increased for individuals who decided to stick to private IRA accounts outside their employee-designated plans. You can now contribute $6,500 in 2023 instead of the $6,000 limit in 2022.
The income phase-out range has also shifted a little. Single filers are moving from a cap of $138,000 to $153,000, and married couples filing jointly from $218,000 to $228,000.
While neither of these will move the meter dramatically one way or the other, they do improve the retirement options of most Americans.
Does this Mean You Should Maximize Contributions?
Now could be the time to start if you’re not maximizing your 401(k) and IRA contributions. Contributions are tax-deferred and pre-tax, which means they can help lower your taxable income. Additionally, there are a variety of investment options from which to choose.
Your goal is to get the full benefit of compound interest. A key part of that equation is as much time as possible. Contribute frequently, hit your maximum amount, and watch your retirement plan grow.
Hiring Expert Accountants Improves Pre-Tax Wealth
As a taxpayer, you may be wondering how the new IRA and 401(k) contributions limit increases will affect your personal finances. In short: It's going to help make sure your retirement savings are maximized.
Hiring Green Valley Tax Services is one of the best investments you can make if you're looking for someone who can help you optimally manage your retirement accounts. We have access to all sorts of different tools that allow us to maximize our clients' pre-tax wealth potential while minimizing your tax burden during your working years—and once you reach retirement age.
While there are many factors to consider when determining which savings vehicle is right for you, the most important thing is that you make an informed decision. Working with a financial planner or Green Valley Tax can help ensure that your plan accounts for all these variables. In the end, though, it’s up to you.
Our team at Green Valley Tax Services can help you build pre-tax wealth, so you have more workable resources to dedicate to long-term retirement savings. The sooner you jump on these opportunities, the more you can maximize the long-term revenue potential.
Schedule a meeting with the Green Valley Tax team today and let us walk you through some of the more valuable tax benefits of contributing to your retirement plans. Our expert financial team stays up to date on the latest developments from the IRS, SSA, and any other agency affecting your savings strategies. Book a consultation today!