The employee contribution limit for 401(k)s will now jump to $22,500 for 2023 — the largest-ever hike due to inflation. Here's how that really helps your retirement goals

Big earners who are big savers have a big reason to smile big: The U.S. government has just raised its limits on a number of retirement accounts for 2023 — a jump that could pay off for those willing to wait out a volatile stock market.

The new limits also serve as a silver lining to inflation rates, as the IRS bases its investment caps on them. That couldn’t come at a better time — you’d have to go back to the 1980s to find inflation this bad.

Even more good news awaits on the tax front. The IRS says taxpayers will see higher standard deductions and tax brackets — which will likely boost take home pay for millions of Americans — while Social Security recipients will see an 8.7% cost of living adjustment in 2023.

Don’t miss

What high earners have to look forward to

Come January, individuals will be able to contribute up to $22,500 to their 401(k) accounts — up $2,000 from the 2022 cap. The IRS will also raise Individual Retirement Account (IRA) contribution caps by $500 to $6,500 beginning next year.

For older investors, the news is even better. The “catch-up” contribution limit for those 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan, will jump from $6,500 to $7,500.

That means investors 50 and over could potentially sock away as much as $36,500 annually.

Will people take advantage of it?

While any relaxation of investment caps is welcome, most 401(k) investors don’t come close to hitting the federal contribution limit. Investment house Vanguard says that only 14% or so of 401(k) investors maxed out their contributions in 2021.

Earlier this year, Fidelity Investments reported that the average 401(k) contributor was saving nearly 14% of their salary, reflecting their percentage contribution plus their employer’s match.

Using Fidelity’s average contribution figure but assuming the saver has no employer match, a worker under 50 who makes $160,714 would meet the government cap in 2023. (These 401(k) contribution caps don’t include employer matching amounts.)

The power of the 401(k)

While the new IRS limits may help high earners most, aggressive savers at lower salaries will also see pronounced benefits — especially those with recurring automatic payments. Taken with employer matches, it’s an ideal combination of free money and painless saving that goes from paycheck to retirement savings virtually without notice.

If you’re panicked over the current stock market funk, follow the https://moneywise.com/investing/investing-basics/buffett-techniques-no-one-talks-about) and keep buying while share prices are low. In time, a market rebound will shave off some of your losses and turbocharge the stocks you bought at bargain basement prices.

“During periods of economic uncertainty, it’s important for retirement savers to stay focused on their long-term savings goals and not make knee-jerk reactions to short-term market events,” said Kevin Barry, president of Workplace Investing at Fidelity Investments, in announcing Fidelity’s report.

So yes, cool heads prevail. The patient will prosper. And it’s hard to confuse feelings with facts when you consider how the stock market has returned 9.72% per year when dividends are reinvested. That dates to 1900, by the way.

Sure, inflation has many of us on the run. But given time, your portfolio should be able to outrun it.

The employee contribution limit for 401(k)s will now jump to $22,500 for 2023 — the largest-ever hike due to inflation. Here’s how that really helps your retirement goals

Don’t miss

What high earners have to look forward to

Will people take advantage of it?

The power of the 401(k)

What to read next