Building a nest egg is an important thing to do if you want to retire comfortably. Sure, you can tell yourself you’ll just turn to Social Security, but doing so could lead to a serious shortfall in income down the road.
Now when it comes to saving for retirement, you have options. If your employer sponsors a 401(k) plan, it may pay to contribute. This is because many of the companies that offer these plans also match workers’ contributions up to a certain point. Plus, 401(k) plans come with generous contribution limits, so if you can allocate a significant portion of your income to retirement savings, you have a great opportunity.
But not everyone has access to a 401(k). Maybe you work for a company that doesn’t offer one. Or maybe you’re self-employed, so it’s up to you to fund your retirement savings without the help of a business.
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If that’s the case, the good news is that you can do very well by saving in an IRA. And next year, the annual contribution limits for IRAs will increase, giving you an even greater opportunity to save funds for retirement and enjoy some tax breaks along the way.
You can save more in your IRA next year
In 2022, the annual contribution limit for 401(k) plans increased by $1,000. But the contribution limit for IRAs remained the same as it was in 2021: $6,000 for workers under 50 and $7,000 for those 50 and older.
Next year, the annual IRA contribution limit will increase from $6,000 for savers under age 50 to $6,500. However, the recovery limit will remain stable at $1,000, which means savers over the age of 50 can deposit up to $7,500 into an IRA in 2023.
Interestingly, the IRS just announced that catch-up contributions for older 401(k) savers will increase from $6,500 to $7,500. Unfortunately, IRA upgrades are not subject to cost-of-living adjustments, so they will stay where they are. But either way, if you can max out your IRA in 2023, it’s worth doing. The more money you save in the short term, the more you will have for retirement.
It’s worth snagging that tax break
Retiring with solid savings isn’t the only reason to try to max out your IRA next year. You should also try to take advantage of the opportunity to get a great tax break.
Traditional IRA contributions are tax-free, so if you manage to put $6,500 into your IRA next year, that’s $6,500 of income that the IRS won’t tax. Now, if you decide to fund a Roth IRA, you won’t get that immediate tax break. But you Will enjoy tax-free investment earnings in your retirement plan, plus tax-free withdrawals once you retire.
Plus, Roth IRAs are the only tax-advantaged retirement plan that doesn’t subject savers to required minimum distributions. This means you have a lot more say in your savings and the option to continue to benefit from tax-advantaged growth well into your later years.
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