Following adjustments made to tax brackets in 2023, the IRS instituted record-breaking increases to the contribution limits for 401(k) and other tax-deferred retirement plans. Starting next year, individuals can contribute up to $22,500 to their 401(k) or 403(b), as well as most 457 plans and the Thrift Savings Plan eligible to federal workers.
This new maximum contribution will be $2,000 higher next year, representing an increase of 9.8% over the current $20,500 federal contribution limit. The so-called catch-up contribution will also be boosted. This is the amount participants over the age of 50 can save on top of the federal limit. In 2023, the catch-up contribution will increase by 15.4% to $7,500.
The amount individuals can contribute to individual retirement accounts – or IRAs – will also increase, including Roth IRAs, which accept after-tax contributions. IRA contributions will rise 8.3%.
Inflation in Focus
By increasing the amount individuals are permitted to save each year, the IRS hopes to ensure money saved for retirement keeps pace with inflation.
Saving for retirement allows you to take advantage of compound interest. Over time, as you contribute incrementally, your nest egg grows exponentially. Financial advisors note it’s important to make contributions at a young age, so as to give the savings more time to experience compound growth. But research shows many fail to take full advantage of this trend.
Investment management company Vanguard estimates that, within the 401(k) plans it provides to employers, just 14% of participants make the max contribution each year and 16% of those eligible made catch-up contributions.
Supercharge Your Savings
These boosts are the latest in a series of government-led inflation adjustments. Congress sets the formulas that determine the changes using the change in prices over time as a guideline.
For individuals saving for retirement, the higher limits are a great opportunity to grow savings. Increasing monthly contributions by 10% may be hardly felt in the near-term and offset significantly by the very strong benefit gained upon reaching retirement. Inflation may feel challenging now, but these IRS changes could have positive downstream impacts.
Learn More:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Advisor
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.
More from MediaFeed:
The most tax-friendly states for retirees
Many people consider relocating in retirement in order to reduce their cost of living and make their savings last longer. When weighing the pros and cons of moving to another state, it’s important to consider the total tax burden there, including state and local taxes on retirement income, property tax, even sales tax. Also, some areas with a lower tax burden have a higher overall cost of living, which can cancel out any savings.
There are many factors to consider when deciding where to put down roots in retirement, from climate to healthcare access. Below we look at the best states to retire in for taxes, and how to tell if moving will be worth it.
Related: Renting out extra rooms guide
Deposit Photos
A number of states exempt Social Security income from state taxes. A smaller number offer a tax break on other retirement income, such as IRAs and 401(k) plans, private pensions, interest, dividends, and capital gains.
These are the 10 states with the lowest taxes for retirees:
- Delaware
- Hawaii
- Wyoming
- District of Columbia
- Nevada
- South Carolina
- Colorado
- Alabama
- Arizona
- Tennessee
But before you complete that change-of-address card, you’ll want to look at the bigger picture.
DepositPhotos.com
When choosing where to retire, it’s wise to first consider issues like safety, access to healthcare, distance to friends and family, or living near other people of retirement age.
Make a list of features that are important to you in a retirement locale, and consider whether any of them could indirectly impact your cost of living – such as being close to friends and family.
Then look at the total cost of living in an area: housing, food, transportation, cultural activities, and other expenses. These retirement expenses generally have a bigger impact on one’s lifestyle than taxes.
Finally, to determine whether a state is tax-friendly for retirees, look at the following.
DepositPhotos.com
Generally Social Security income is subject to federal tax. But some states also tax Social Security above a certain income threshold, while other states offer tax exemptions for individuals in lower tax brackets.
The states that tax Social Security benefits are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.
Zinkevych / istockphoto
Many states tax income from pensions and 401(k) plans, but 12 states do not. These states are Alaska, Florida, Illinois, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington and Wyoming.
Most of these states don’t have state income tax at all, with the exception of Illinois, Mississippi, and Pennsylvania. Alabama and Hawaii tax 401(k) plans and IRAs, but not pension plans.
DepositPhotos.com
When choosing the best state for you to retire in, it’s a good idea to look into sales tax and property taxes too. States that don’t charge sales tax are Alaska, Delaware, New Hampshire, Montana, and Oregon. On the other hand, New Hampshire has very high property taxes, reducing the benefit of no sales tax.
Recommended: When to Start Saving for Retirement
insta_photos/iStock
Choosing the best state to retire in sometimes means making compromises. If safety and healthcare access are top priorities, for instance, you may not get your ideal weather. But for many retirees, a high cost of living is a deal-breaker.
Here are the 10 states with the highest annual cost of living for retirees:
- Hawaii: $99,170
- California: $71,809
- New York: $69,847
- Massachusetts: $69,279
- Oregon: $68,712
- Maryland: $67,214
- Alaska: $66,956
- Connecticut: $66,543
- New Jersey: $64,736
- Rhode Island: $62,413
Recommended: Avoid These 12 Retirement Mistakes
twinsterphoto / iStock
As noted above, the best state to retire in will depend on an individual or couple’s budget, lifestyle, and values. But recent trends may help point you in the right direction.
These are the top 10 states that retirees are moving to:
- Florida
- Arizona
- North Carolina
- South Carolina
- Texas
- Tennessee
- Idaho
- Oregon
- Nevada
- Alabama
DisobeyArt/ iStock
If cost of living is your sole concern, the following are the 10 least expensive states:
- West Virginia
- Arkansas
- Mississippi
- Indiana
- Alabama
- Ohio
- Kansas
- Kentucky
- Iowa
- Oklahoma
Halfpoint / istockphoto
An area’s total tax burden is the sum of all property taxes, sales taxes, excise taxes (which affect the price of goods), and individual income taxes. Below are the states with the lowest total tax burden for retirees.
SoFi
One way to measure the overall desirability of an area is the number of millionaires who live there. After all, millionaires can afford to live in states that have high-quality healthcare, nice weather, and diverse cultural offerings.
These are not the cheapest states in terms of cost of living or taxes, but their popularity may help non-millionaires reevaluate their must-haves vs. nice-to-haves.
SoFi
For workers who already live in a state with moderate taxes, near family, and have a lifestyle they enjoy and can afford, there may not be any compelling reason to move. But for those looking to make a change or lower their retirement expenses, it may make financial sense to relocate.
Just remember that housing, food, transportation, and other expenses usually have a bigger impact on one’s retirement lifestyle than taxes.
shapecharge
- Potentially lower cost of living
- Discovering a community of like-minded retirees
- Possibly ticking off other boxes on your list
Ridofranz/istockphoto
- Other living costs may cancel out the tax benefits
- Moving costs are high, and the stress can be tough
- Need to find another home in a seller’s market
monkeybusinessimages / istockphoto
What are the 3 states that don’t tax retirement income?
Nine states don’t tax retirement plan income because they have no state income taxes at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Illinois, Mississippi and Pennsylvania don’t tax distributions from 401(k) plans, IRAs, or pensions. Alabama and Hawaii don’t tax pensions, but do tax distributions from 401(k) plans and IRAs.
Which state is the best state to live in for tax purposes?
Alaska has the lowest overall tax rates.
Which states do not tax your 401k when you retire?
Alaska, Alabama, Hawaii, Florida, Illinois, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, and Wyoming do not tax 401(k) plans when you retire.
adamkaz
The best state to retire in for tax purposes depends on an individual’s budget, lifestyle, and values. Some states with lower taxes for retirees can have higher housing and transportation costs, canceling out any tax benefit. A financial advisor can help you decide if saving on taxes is worth the expense and trouble of relocating.
Learn More:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
SoFi’s Relay tool offers users the ability to connect both in-house accounts and external accounts using Plaid, Inc’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score provided to you is a Vantage Score® based on TransUnion (the “Processing Agent”) data.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
shapecharge
DepositPhotos.com
Featured Image Credit: Tinpixels.
