It's time to boost 401(k) contributions for 2023: 'You're smart to jump on this,' says advisor (2024)

FAQs

It's time to boost 401(k) contributions for 2023: 'You're smart to jump on this,' says advisor? ›

If you're eager to boost your retirement savings, there's good news for 2023: higher 401(k) contribution limits. And now is the time to adjust your deferrals, financial experts say. You can funnel $22,500 into your 401(k), 403(b) and other such plans for 2023, up from the $20,500 limit in 2022.

In 2023, Americans will be able to contribute more money to their 401(k)s than at any point in the last 30 years. The maximum contribution limit for 401(k)s increases from $20,500 in 2022 to $22,500 in 2023—the highest since 1985. This means that Americans can save more money for retirement than ever before.

Even a 1% annual increase in your retirement savings could mean thousands of dollars decades later, thanks to compound interest and time in the market. By increasing your 401(k) contributions now, you can give your money more time for potential growth and help put yourself on a path to a more secure financial future.

It's a good rule of thumb to avoid making a 401(k) early withdrawal just because you're nervous about losing money in the short term. It's also not a great idea to cash out your 401(k) to pay off debt or buy a car, Harding says. Early withdrawals from a 401(k) should be only for true emergencies, he says.

Individuals who are age 50 or over at the end of the calendar year can make annual catch-up contributions. Annual catch-up contributions up to $7,500 in 2023 and 2024 ($6,500 in 2021-2020; $6,000 in 2015 - 2019) may be permitted by these plans: 401(k) (other than a SIMPLE 401(k)) 403(b)

Fidelity recommends aiming for a savings rate of around 15%, including any employer match. On average, people in their 50s have a savings rate of about 15.7%, per Fidelity data provided to CNBC Make It. For 2023, the annual 401(k) contribution limit is $22,500.

Despite contribution limits, often times employees will contribute what they can afford to set aside for retirement. Financial experts generally recommend that everyone contribute 10% of their paycheck to a 401(k), but this may not be doable for all.

Your 401(k) should be a long-term investment. It's typically the time in the market that matters most, not the perfect entry point. It's never too early to set up a 401(k)—but there's no real benefit in maximizing your contribution as quickly as possible when offered an employer match.

Many retirement planners suggest the typical 401(k) portfolio generates an average annual return of 5% to 8% based on market conditions. But your 401(k) return depends on different factors like your contributions, investment selection and fees. Sometimes broader trends can overwhelm these factors.

You can set your contribution to have a specific amount of each paycheck added to your 401(k) account, or you can have a certain percentage of your paycheck taken out. Since 401(k) contributions are pre-tax, the more money you put into your 401(k), the more you can reduce your taxable income.

What is the rule of 55 for 401k? ›

This is where the rule of 55 comes in. If you turn 55 (or older) during the calendar year you lose or leave your job, you can begin taking distributions from your 401(k) without paying the early withdrawal penalty. However, you must still pay taxes on your withdrawals.

Once you reach 59½, you can take distributions from your 401(k) plan without being subject to the 10% penalty. However, that doesn't mean there are no consequences. All withdrawals from your 401(k), even those taken after age 59½, are subject to ordinary income taxes.

Total 401(k) savings rates–reflecting combined employee and employer 401(k) contributions–remained steady at 13.9%, consistent with Q2 and Q3 2023 and up slightly from a year ago (13.7%).

Those making less than $145,000 can continue making catch-up contributions to their regular pre-tax 401(k)s. Those making $145,000 or more will have to put their catch-up dollars in a Roth 401(k)—which means those contributions will be after-tax, though their withdrawals in retirement will be tax-free.

The 401(k) contribution limit for 2023 is $22,500 for employee contributions and $66,000 for combined employee and employer contributions.

Depending on the employer's terms regarding the 401(k) plan offered, catch-up contributions can technically be matched if the employer contributes up to the amount allowed by the IRS. U.S. Department of the Treasury. "Treasury Provides Guidance on Catch-Up Contributions." Internal Revenue Service.

The average 401(k) balance rose to $107,700 by the third quarter of 2023, up 11% from the year before, according to the latest update from Fidelity Investments, one of the largest retirement plan providers in the nation.

The average 401k employer match in 2023 is around 4% to 6% of salary. According to a recent study by the US Bureau of Labor Statistics, 41% of companies that offer a 401k plan provide employer matching contributions up to 6% of employees' salaries.

RMD rules for 401(k)s also apply to traditional IRAs. You'll need to begin required minimum distributions the year you turn 73 if you turn 72 in 2023 or later. The RMD age will increase to 75 by 2033.