Inflation may be ruining everything from bond coupon interest payments to holiday travel plans but being able to put more away for retirement is one unexpected positive.
On Friday, the Internal Revenue Service raised the amount of money one can put away into a 401(k), 403(b) and most 457 plans to $22,500--up approximately 9.8% from the current $20,500 limit, the hike is the largest increase ever made by the revenue service's history.
Alongside new tax brackets also introduced by the IRS this week, the larger contribution room is meant to offset the rising cost of living that is chipping away at many people's retirement plans.
While changes to the work-tied 401(k) are by far the most far-reaching (Americans held over $10.4 trillion in 401(k) assets in 2022), a number of other tax-deferred retirement plans are also going to have hirer contribution limits.
What Are the Other Plans Affected by the Increase?
The limits for 403(b) and 457 plans, which are the equivalent of the 401(k) for public school and government employees, will also be raised to $22,500. The equivalent for those saving independently from an employer, the IRA will see the limit cap raised from $6,000 to $6,500 with an additional $1,000 a year for those over 50 (the $1,000 limit remains unchanged.)
"Therefore, participants in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan who are 50 and older can contribute up to $30,000, starting in 2023," the IRS wrote in a news release.
The contribution limit for the Thrift Savings Plan, which is a special retirement plan for members of the military and federal employees, will be raised from $6,500 to $7,500.
Shutterstock
This Is how you Maximize the Increased Limits
The most important thing to know about the changes is that they will only come into effect in 2023--you will have to wait until January to formally change your contributions.
Contributing the maximum limit will certainly add up and benefit investors by the time retirement comes along but, for the majority of workers, contributing such a high percentage of one's salary is not feasible--instead one should calculate a percentage that will allow you to both save and cover day-to-day living expenses.
Financial experts will generally recommend putting 15% to 20% of one's salary toward retirement with the number veering higher as one ages. Cutting back in some areas to contribute more is generally a good idea--analysts at investment advisory firm Vanguard estimated that only 14% of those who have a 401k maximized their contributions in 2021.
The new limits do not apply to any contributions matched by an employer--in 2022, the average employer matched 3.5%.
The IRS also made a number of changes to the limits for making deductible contributions to an IRA, add to Roth IRAs or receive the Saver’s Credit--for Roth IRAs, one's income must fall below $153,000 for single people and $228,000 for those filing jointly.
Those numbers were at $144,000 and $214,000 prior to the changes.
"Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions," the IRS writes. "If during the year either the taxpayer or the taxpayer's spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income."
Women, Divorce and Retirement: Creating Your New Personal Finance Plan
Your divorce is final–now what? Handling the details and preparing your new personal finance plan brings challenges and opportunities. Divorce and financial planning experts Amy Shepard and Rick Fingerman, will join Robert Powell, editor and publisher of Retirement Daily on TheStreet, for this live webinar to explain next steps and answer your questions. The webinar will be at 1 p.m. E. on Nov. 16. Get more information and register here.
