Financial Advisor Urges Boosting 401(k) Contributions for 2023: "You're Smart to Act Now"

If you're looking to boost your retirement savings, the good news is that 401(k) contribution limits will be increasing in 2023. Now is the time to adjust your deferrals, according to financial experts.

The contribution limit for 401(k), 403(b), and other similar plans will increase to $22,500 in 2023, up from $20,500 in 2022. Employees aged 50 and older will be able to contribute an additional $7,500, up from $6,500 in 2022.

According to Vanguard's estimates for 2022, 14% of investors will max out employee deferrals in 2021. This is based on data from 1,700 plans and nearly 5 million participants.

There are a few things you can do to boost your finances in 2023.

First, take advantage of any tax changes that could benefit you.

Second, consider investing in some high-growth areas.

And finally, make sure to build up your emergency savings so you're prepared for anything that comes your way.

Catherine Valega, a certified financial planner and founder of Green Bee Advisory in Boston, praised your decision to increase your 401(k) contributions. "Most people set [401(k) contributions] once and never look back," she said.

If you want to make the most of your 401(k) contributions for 2023, it may be a good idea to start early. This way, you can spread out your contributions over the course of the year, rather than trying to contribute more later on.

More time in the market may offer more growth potential, said Marguerita Cheng, a Gaithersburg, Maryland-based CFP and CEO of Blue Ocean Global Wealth.

"The sooner you can increase your contributions, the sooner you can have your money working for you," said Cheng. "This is why it's so important to start saving as early as possible."

If you earn a high income, you may want to consider making 401(k) contributions early in the year to reach the deferral limit before the end of the year.

For example, if you receive an October bonus, you may contribute the maximum amount to your 401(k) plan, freeing up more take-home pay for November and December.

Before you max out your 401(k) plan, you need to know how your company's matching funds work. Many companies only match a portion of your paycheck if you defer it into your 401(k).

If that is the case, you will not get the full employer match unless you make 401(k) contributions every pay period.

However, some 401(k) plans have what's known as a "true-up." This means that the company calculates the 401(k) match on an annual basis, rather than every pay period.

"This means that the company is not as concerned with when you contribute to your 401k," Valega explained. "They want to make sure you get the full match at the end of the year."

You can learn more about your 401(k) account by checking your summary plan description, which covers how the account works, or by reviewing the document with a financial advisor.

There are a few reasons why you might decide to limit your 401(k) contributions after receiving the full company match. For one, maxing out your 401(k) contributions can be a lofty goal, and you may not want to tie up all of your money in retirement savings. Additionally, you may want to leave some room in your budget for other savings goals, such as buying a home or saving for college. Ultimately, it's up to you to decide how much to contribute to your 401(k), and there's no wrong answer.

"Your goals will dictate how much you need to save for retirement," said Marianela Collado, a CFP and CPA at Tobias Financial Advisors in Plantation, Florida.

For example, if you're saving for a down payment for a home, you may temporarily reroute funds to meet your short-term goal, said certified financial planner Sophia Bera.

If you're sitting on high-interest credit card debt or don't have an emergency fund, you may want to allocate money elsewhere before increasing 401(k) deferrals.