Save Now for a Happy Retirement - 2023 Limits

Someday I hope to be able to retire and enjoy that retirement comfortably with Larissa by my side.  We have had many adventures and hope to do many more.  Early in our careers we found it prudent to start contributing to our 401(k) and retirement plans as best as we could.  Many times, it was a big sacrifice to do so as it took away from our take home pay.  However, I am grateful today for the sacrifices I made at the start of my career that not only started our retirement nest egg but also created a good habit of saving for retirement.

One of the things I get to do in my job is to be a part of people's retirement planning discussions.  I get to see people's income each year and also get to see how much they've contributed into a retirement account.  It brings me an incredible amount of joy when I see people saving money wisely to be able to retire one day.  It also brings me an incredible amount of joy when I help people create a retirement plan that suits their needs based on their income levels and savings desires.  Retirement plans can get very confusing.  There are IRA accounts, Roth IRA accounts, SIMPLE IRA accounts,  SEP IRA accounts, 401(k) Plans and many other retirement accounts.  There are also Roth Contributions, Pre-Tax Contributions (Traditional) and Post-Tax Contributions and terms like back-door Roth conversions and mega back-door Roth conversions.   It can all get very confusing very quickly.  And as much as I would like to admit that I understand the rules perfectly, the fact is that I don't.  I know enough to start the discussion but I rely on several financial planners and advisors that understand the rules more thoroughly and also watch the markets better than I do.

Regardless of your circumstances - here are some things that I think everyone should get familiar with in order to have a conversation with a retirement advisor:

• Pre-tax (or traditional) contributions mean that you get a tax deduction now rather than a tax benefit later.  When you pull your funds out during retirement then they will be taxable upon distribution.  This benefits people most if they expect to be in a higher tax bracket now than when they retire.

• Roth contributions mean that you do NOT get a tax deduction for the contributions now but you do get a tax benefit later.  When you pull your funds out during retirement then your distributions are tax free - including the growth that your account has had!  This benefits people most if they do this early in their careers to have more time for their retirement accounts to grow tax-free.

• For 2023, the maximum amount you can contribute into an IRA account (or Roth IRA account) is $6,500.  If you are married then your spouse can also contribute $6,500 into an IRA or Roth IRA account.  There are income thresholds based on your filing status as well as restrictions based on whether your employer offers you a retirement plan - but the general rule is that you can contribute $6,500 if you have earned income.

• For 2023, the IRA contribution limit if you are over 50 years old is $7,500.  The IRS allows people 50 years and older to contribute $1,000 more than their younger colleagues to help catch-up their retirement savings.  

• For 2023, the maximum you can contribute to a 401(k) plan (or other similar employer-sponsored retirement plans) is $22,500.  If your spouse also works, then they can also contribute $22,500 into a 401(k) plan.  Contributions like this are called "employee deferrals" and many companies also offer a "employer match" or "profit sharing contribution".  Those employer matching contributions generally range from a 1% to 4% match.

• For 2023, the maximum 401(k) contribution limit for people over 50 years old is $30,000.  The IRS allows people 50 years and older to contribute an extra $7,500 more than their younger colleagues to help catch-up their retirement savings.

• For 2023, the maximum contribution into a SIMPLE IRA is $15,500.  That limit goes up to $19,000 if you are over 50 years old.

• For 2023, the maximum contribution into a SEP-IRA is $66,000.  The restriction on SEP-IRA accounts is that it cannot exceed 25% of compensation - so you'd have to have $264,000 in W2 income to be able to max that contribution out.  Different restrictions apply if you file as a Sole-Proprietorship.

As mentioned previously, there is a lot of information about retirement plans and their respective rules.  Having a retirement account can be an incredible asset for you as you pave your way to retirement.  There are tax-savings opportunities that you can employ to have the retirement that you want.  If you have questions about what you can do to save for retirement - please feel free to reach out to me and we can start the conversation.