The best way to reduce taxes and set yourself up for a comfortable retirement? Putting money toward a tax-advantaged retirement plan. If you’re not already making the most of an employer-offered 401(k) or Roth 401(k), now is the time to start. The sooner you start contributing to your retirement plan, the more substantial your nest egg will be.
Looking to build up that nest egg even more? Consider increasing your contribution (if you’re not already contributing the maximum amount allowed). Thanks to tax-deferred compounding—or, in the case of Roth accounts, tax-free—boosting contributions can significantly impact the amount of money you’ll have once you retire.
Retirement plan contributions in 2023
With a 401(k), an employee can elect to have a certain payment amount deferred and then contributed to their plan by an employer on their behalf. Due to inflation, these amounts are unsurprisingly increasing—the contribution limit in 2023 will be $22,500, compared to $20,500 in 2022.
Employees who will be 50 years of age or older by the end of the year will also be able to make additional “catch-up” contributions of $7,500 in 2023 (compared to $6,500 in 2022). As a result, these employees can save a total of $30,000 in 2023 (compared to $27,000 in 2022).
401(k) contributions
There are many benefits to contributing to a traditional 401(k). For example:
- Contributions are pre-tax, which reduces your modified adjusted gross income (MAGI), and can also help to reduce or avoid the 3.8% net investment income tax.
- Plan assets can grow tax-deferred, which means you don’t have to pay any income tax until you take distributions.
- All or some of your contributions can be matched by your employer pre-tax.
If you’re already contributing to a 401(k) plan, you may want to take a closer look at your contributions for 2023, aiming to increase your contribution rate to get as close to the $22,500 limit as possible—with an extra $7,500 for those aged 50 or older.
Note that your paycheck will be reduced by the amount of contribution only, as these are pre-tax and income tax is not withheld.
Roth 401(k) contributions
High-income earners may benefit from Roth 401(k) contributions, as they don’t have Roth IRA contributions as an option. This is because if your adjusted gross income exceeds a certain threshold, your ability to contribute to a Roth IRA is reduced or eliminated.
If your employer offers a Roth option in their 401(k) plans, you can designate some or all of your contributions as Roth contributions. While these contributions won’t reduce your MAGI, qualified distributions will be tax-free.
Plan your financial future with Smolin
If you’re not sure how much to contribute, or how to determine the best combination of traditional and Roth 401(k) contributions, our knowledgeable tax advisors can help.
Contact us to get the most out of your 401(k) plan or to discuss other tax and retirement-saving strategies.