IRS raises retirement savings cap for 2023, but few even make it. Here’s what you can do about it.

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Most of the news about inflation has been bad, but retirement savers may have gotten a silver lining — if they’re savers and if they can afford to take advantage of it.

Last month, the IRS lifted the cap on how much people can save in retirement accounts on a tax-deferred basis by a record amount, mainly due to rising inflation.

But here’s the problem: According to Vanguard, only 14% of employees who participate in occupational retirement plans contributed to the IRS limits last year.

Add to that four decades of high inflation, and 54% of the 1,000 Americans Allianz Life surveyed in September said they’ve stopped or reduced their retirement savings.

And as people’s expectations rise about how much they need to retire comfortably ($1.25 million now, according to a recent Northwestern Mutual survey, 20% more than last year), people are saving less.

“I think what’s going to happen is that those who are maxing out now will benefit from the new limits, but that’s only a small fraction of the people who contribute to retirement plans,” said Kelly LaVigne, vice president of consumer insights at Allianz. life.

But that doesn’t have to be the case if people follow budgeting and savings steps, they too can be on their way to tax-free profit growth.

What are the 2023 401(k) limits?

In 2023, employees who participate in occupational retirement plans will be able to contribute $22,500 to their 401(k), an increase of $2,000 from last year. Those who do not participate in an employee-sponsored plan can contribute $6,500, up from $6,000, to an individual retirement account (IRA).

In addition, the catch-up contribution limit for employees age 50 and older will increase to $7,500 in 2023, from $6,500 in 2022. That means those participants can contribute up to $30,000 in total. However, the IRA withdrawal contribution limit remains at $1,000, the IRS said.

What is a 401(k) and an IRA, and what’s the difference?

A 401(k) is a retirement savings plan offered by companies to employees. Many companies also agree, meaning that they contribute the same amount to your pension, usually up to a certain amount. Only your contributions count toward the IRS limit, so matching can increase your total savings over the IRS limit and is what advisors call “free money.” So at least contribute enough to get the full match, if you can, advisors say.

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Contributions are deducted from your paycheck before taxes, so that also lowers your taxable income. You only pay tax on withdrawals, so your money grows tax-free while it’s in your 401(k).

IRAs are opened by individuals through a brokerage or bank. Depending on your income and the status of your tax return, all or part of your contributions may be fully or partially deductible, making this investment also tax-advantaged. Only withdrawals are taxed.

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What do people think about retirement?

Nervous, but still not stored properly.

Last year, nearly 70% of people surveyed by Invesco said they fear they will run out of money when they retire.

Americans’ average retirement savings fell 11% to $86,869 from $98,800 last year, while their projected retirement age has risen from 62.6 last year to 64, the survey said.

Why don’t people save for retirement anymore?

There are many reasons.

“People like to live in the moment, and retirement is too far away for many to think and plan,” says Brian Snow, who invests and saves with his investment club BetterInvesting.

Many consumers have to get the money elsewhere, thanks to inflation, which “is outpacing average hourly wage growth and has squeezed household budgets, and a limited capacity to increase retirement savings is a by-product of that,” said Greg McBride, head financial analyst at Bankrate. .

Others lack the financial knowledge or discipline.

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Salary isn’t “the only factor why people don’t maximize the 401k,” says saver Byron Williams. “It’s not about how much someone earns, but what he does with what he earns.”

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How do you start saving?

Start with a budget, advises Akari Muhisani, who credits a 2008 “Jesus moment” as a jump start to his savings plan.

“I had $25,000 in credit card debt and didn’t want to be broke and live paycheck to paycheck like my mom,” Muhisani said.

He started putting extra money into his debt, the smallest balance first. In two years, Muhisani paid off his credit card balances.

After that, he started saving, setting aside 10% of his income for his future. He now has emergency savings of about three to six months in living expenses and retirement savings. If he has money left over at the end of the month, he will add more to his savings or his 401(k) maximum.

Williams contributes a percentage of his annual raises to his 401(k).

“Some years I took the whole raise and put it in the 401(k), which left me living on the same salary as the year before,” he said. “It’s not rocket science, but rather based on knowing the power of a 401(k) and having the discipline to do it.”

Some advisors suggest investing your tax refund as well.

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How do you grow your savings?

Invest it – early.

“Too many people put it off and don’t invest early,” Snow said.

Early is key for compounding, which means reinvesting income on your savings to generate their own income, allowing for exponential growth.

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If you can’t save the recommended 12% to 15% of your annual income, “save at the level you can,” says Matt Fleming, wealth advisor at Vanguard Personal Advisor Services. “Later, increase contributions by 1%-3% per year to reach your goal.”

And it’s better to automate savings so that they are debited monthly from your paycheck or bank account to your 401(k) plan or other retirement fund.

You put your money to work as you earn it, giving you more time for compound growth.

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But how do you invest it?

Investing can be daunting with so many numbers, options and tax implications. Some people turn to financial advisors. Muhisani joined an investment club.

“Investment clubs are great for meeting ordinary people, retirees doing this – man, they’re so smart and they’ve never studied this before,” he said, noting that the Beardstown Ladies club inspired him. “They are ordinary ladies who invest in the market and are always at the forefront of TBEN’s investment challenge.”

There, he says, he learned about corporate financial statements, valuations, funds, benefits, retirement funds and more and turned his savings into about $1 million in total retirement money.

Education would be the first step, Williams said. “Making sure people really understand the 401(k), its benefits and how to use it is key.”

Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personalized financial tips and business news Monday through Friday mornings.

This article originally appeared on USA TODAY: IRS Raises Retirement Saving Limits, But Few Reach Them. Here’s how you can