3 401(k) money moves to make in 2023

This week is going to start with retirement accounts. It was supposed to be about my 3 favorite accounts, but I wanted to give each account type a full article with all you need to know.

Retirement doesn’t feel tangible because it’s decades away for many and in the US we’ve been told to plan for it to happen at 65. We * cough * millennials love instant gratification so saving part of a paycheck for something 30+ years away is challenging to mentally prepare for. However, it can save you from the feeling that you can’t retire and stress if you simply take time to plan. At the beginning of each calendar year I review new limits and rules to plan for my goals. Let’s start by talking about the 401(k) plan.

Before we dive in - here are a few interesting facts on the history of the 401(k)

• 1978 - the 401(k) was brought to life as part of a Revenue Act in Congress

• 1983 - 7.1 million employees participated in a 401(k) plan

• 2019 - ~80 million employees participated in a 401(k) plan

Don’t forget! Retirement accounts have tax benefits that regular investment - also called brokerage accounts - do not. Most commonly you don’t pay taxes on the contributions you put into your traditional 401(k) and only need to pay taxes when you withdraw your money in retirement. If there is one thing we can agree on, paying fewer taxes is from your paycheck is pretty awesome!

1. Review your company’s 401(k) plan

Most companies explain 401(k) plans as part of company onboarding since it’s a great benefit and a way for employees to save for retirement. Plus, companies will usually match some of what you contribute. Not sure where to start? Check your benefits/payroll website or reach out to your HR team.

Companies can match your 401(k) contributions in a few different ways. Companies I’ve worked at have offered a partial match or dollar-for-dollar match with a limit. Below are two examples:

Partial Match

• Example - employers will contribute 50% of what you contribute, up to 6%

• If you make $100,000 and set up a 6% contribution of $6,000 per year, your company will match $3,000 per year for a total of $9,000 contributed to your 401(k) in 1 year

Dollar-for-Dollar Match with Limit

• Employers will contribute 100% of the amount you contribute up to 3%

• If you make $100,000 and have a 3% contribution of $3,000 per year, your company will match $3,000 per year for a total of $6,000 contributed your 401(k) in 1 year

Educate yourself about what your company offers, understand how your financial picture fits in & take advantage of your company’s match.

2. Adjust your contribution

In 2023 the IRS (Internal Revenue Services) raised 401(k) contribution limits to $22,500, up from $20,500 in 2022. While this could be out of reach for most people it’s something to keep in mind, especially for high earners. At the beginning of each year it’s important to review the IRS contribution limits and adjust your contributions accordingly.

Even if $22,500 is out of reach, can you increase your contribution by even 1%? If so, I recommend making this change to save more for your future self. Going back to my previous example an extra 1% at a $100,000 salary is $1,000 more that you can invest over time towards your retirement!

3. Review your investment options

401(k)s can have a variety of different investment options, though they might be limited. While that sounds like a bad thing, it can make decisions easier without needing to be an investing genius.

One type of mutual fund commonly offered is a target date fund. Target date funds have a year in their name such as the Vanguard Target Retirement 2050 Fund. Wait… what does that mean? Target retirement funds create a mix of stocks and bonds that change over time towards your target retirement date, in this case 2050. While no investment is perfect target date funds can be a good choice if you don’t want to spend a lot of time on your investment decisions.

Each January I take 1 hour to review my retirement account, the change over the last year, my investment choices. It’s great to review your progress towards retirement and understand if you need to make any adjustments.

There you have it - 3 tips towards preparing you for retirement with your 401(k). Don’t have a 401(k) or already a pro? Learn more about my other favorite retirement accounts, the Roth IRA and HSA, in the next few weeks!

Follow me @pointsforchange on Instagram for more posts and content coming soon.

Disclaimer: I am not a financial advisor. My suggestions are simply suggestions and not financial advice. You should always consider your personal financial situation and what works best for you prior to making financial decisions because personal finance is… well… personal.

---