For 2022 you are able to increase your IRA contribution to $6,000 per year and if you’re over 50, then the amount is increased to $7,000 per year. For 401(k) savings plans, the amount is raised to $20,500 per year and if you’re over 50, it’s been raised to $27,000 per year. This small increase may not seem like a lot, but it really adds up over time.
Easy Ways to Increase Retirement Savings
Small increases and upticks in contributions can make a massive difference in long term savings making this a perfect time to re-evaluate how much you are currently contributing. If you are contributing to an IRA, consider setting up a periodic savings plan and increasing the monthly amount on a regular basis until you reach the maximum. If you’re covered by a company 401(k) plan, then consider increasing the percentage of your pay that you contribute.
Making 401(k) Contributions in 2022
You have complete control over how much money comes out of your income and goes into your 401k. You can raise your contribution by up to 100% of your income for 401(k) plans. This is a great time to consider raising your contribution, even by just a little bit. Imagine raising your contribution from 5% to just 6%. For example, if your yearly income is $75,000, your 5% contribution is $3,750. If you raise that to 6%, your yearly contribution will jump to $4,500. Pushing the contribution percentage to 7% will be $5,250.
You can see by this example how much a one percent increase makes a difference in your savings. Many people like to increase their percentage on milestone dates like their work anniversary or birthday. Commit to making an increase at least once a year until reach the maximum. This is a great habit to get into with long term benefits!
Taking Advantage of Company Matches for 401(k)’s
This is an often-underutilized benefit. Many companies offer to match their employees' 401(k) contributions. If this perk comes in your company benefits package, consider taking full advantage of it! Make sure you’re contributing at least enough to qualify for the maximum matching contribution. For example, if your company matches your 401(k) savings at a rate of 50% of the first 6% of your contribution, then in order to get the maximum match, you need to contribute 6%. In our example above, if you’re contributing $4500, you qualify for the maximum match, and your employer will add an additional $2,250 to your 401(k) account. Those funds would otherwise not be available to you, so you might as well contribute enough to receive their match.
Can You Contribute to Both an IRA and 401(k)?
If you or your spouse are covered by an employer sponsored plan, like a 401(k), then you will typically make your contributions to the 401(k) plans first. There are certain income limitations and rules. Attached is a flow chart to use to help you decide where to make your contributions.
Pay Yourself First
You've probably heard it a million times, but you come first, no matter what is happening in life. Think of your 401(k) or IRA contributions as paying yourself first. Paying yourself first is a financial strategy that helps you increase your savings in a consistent and regular way. When you pay yourself first, you're prioritizing your long-term financial well-being. This systematic approach is incredibly empowering.
While paying yourself first is essential, your comfort level with the amount is also crucial. Start by paying yourself what you can afford, and then systematically increase it on milestone dates, like your birthday or work anniversary.
Speak to your Financial Advisor
It’s important to speak to a Financial Advisor to work through the appropriate savings plan for your situation, as some of the nuances can be tricky, especially if you’re considering making contributions to a Roth IRA or Roth 401(k.) Roth contributions are different in that they’re not tax deductible, and depending on your income level, you might not be eligible to even make them. We will discuss Roth’s in greater detail in a future article. In the meantime, if you have any questions about this article, please email me at [email protected].