If you’re expecting a job change or a salary increase this year, congratulations! With a job change often comes a higher salary. Instead of letting your lifestyle creep up to match that new higher salary, consider increasing your 401(k) contributions instead. But how much should you contribute to a 401(k)? What are the 401(k) contribution limits and how do I contribute? Let’s take a look.
Why Do I Need to Increase My 401(k) Contributions?
A higher salary after a job change or a promotion can be exciting —especially when we’re seeing rising prices of gas, groceries, and the cost of living. With 64% of people already living paycheck to paycheck, bringing home a little more money each month is a welcome relief to the bank account.1 But what about your retirement savings? We often recommend that people invest at least 10 to 15% of their paychecks into retirement accounts like their 401(k). But as you make more money, it’s important to remember to increase your contributions to stay on track with your retirement goals.
What Benefits Come With 401(k) Savings?
When you contribute to your 401(k), you’re contributing money from your paycheck before taxes are taken out. That means that anything you save gets to grow and compound tax-free, giving you more savings opportunities for your hard-earned dollars.
A 401(k) is a great way to save money for retirement. And if your employer offers a matching program, that’s even better! Let’s say your employer offers a dollar-for-dollar match up to 6%. That means that every single dollar you contribute to your 401(k) will be matched (for free) by your employer up to 6% of your earned income. It’s a huge benefit and one you should take advantage of if you have the opportunity.
Don’t worry, if you leave your current employer, you still get to keep your (and your employer’s) contributions. You can choose to roll it into an Individual Retirement Account (IRA) or roll it all into a new 401(k) account with your next employer.
How Do I Contribute to My 401(k)?
Now that you know the benefits of a 401(k), you’re probably wondering how you can contribute. Since a 401(k) is offered by your employer, they take care of your contributions. At the beginning of each year (or whenever you may decide to start saving), you can let them know how much of your paycheck to put towards your account. That number will automatically come out of your paycheck (before taxes) each month.
When and if you decide to contribute with a new or higher salary, just contact your employer and let them know you want to increase your contributions. Depending on their process, you may have to fill out and submit paperwork, or it could be as simple as an email.
What are the 2023 Contribution Limits?
In 2023, the IRS increased the 401(k)-contribution limit by $2,000 to $22,500 to help combat the rising costs of inflation. If you’re at least 50 years old, your contribution limit increases to $30,000. 2 With so many people living paycheck to paycheck, it’s harder to put aside that money for the future. But with the new SECURE Act 2.0, President Biden is making it mandatory (in 2025) for employers to automatically enroll employees into 401(k) or 403(b) accounts as an employee benefit.
If you have the opportunity, we encourage you to take advantage of that benefit! And if you’re currently enrolled in a workplace 401(k) plan, make sure to increase your contributions and take advantage of that extra $2,000 in retirement savings.
If you want to learn more about your 401(k) options or increasing your 401(k) contributions, we can help! Connect with a SageSpring Wealth Partner today.
Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
