It’s not too late to make these retirement moves for the New Year
A new year means a fresh start, and there are few better things to do than making sure you know exactly where you stand financially. This is especially true when it comes to retirement accounts, which often are approached with a set-it-and-forget-it mindset.
Now’s a great time to make the following retirement moves for 2023 if you haven’t already.
Make your 2022 IRA contributions
IRAs can be great tools to help you save and invest for retirement because of the tax breaks they provide. With a traditional IRA, you can deduct your contributions, depending on your income, filing status, and whether you’re covered by a retirement plan at work. However, the money is taxable upon withdrawal. With Roth IRAs, your contributions are not tax deductible, but you receive tax-free withdrawals in retirement.
For the 2022 tax year (what you’ll be filing in April 2023), the maximum you can contribute to an IRA, both Roth and traditional combined, is $6,000 ($7,000 if you’re 50 or older). For the 2023 tax year, the IRS raised the contribution limits to $6,500 and $7,500, respectively.
You have until Tax Day of the following year to contribute to an IRA. In this scenario, you have until April 18, 2023, to make your 2022 IRA contributions. Next year, you’ll have until Tax Day 2024 to make your 2023 contributions, and so forth. If you haven’t maxed out your IRA, consider taking advantage of the chance before it’s too late.
If you’re saving for retirement, you might as well take advantage of tax breaks along the way. It’s especially important to contribute to a Roth IRA if you’re eligible because they have income limits you may eventually not meet.
It can’t be overstated how much you can save yourself by having your investments grow and compound with tax-free withdrawals. It can be well into the five- or six-figure range, depending on how early you begin.
Adjust your 401(k) elections
Your risk tolerance isn’t set in stone. It will likely change over time, and your 401(k) elections should reflect that reality. As we begin a new year, it’s never too late to adjust your 401(k) elections to ensure you’re comfortable with where your money is going.
For example, some may decide that with the less-than-ideal economic conditions and looming recession, they want to lean on large-cap stocks because they’re historically more stable. If you have more time on your side until retirement, you might use this opportunity to load up on beaten-down small-cap stocks because of the growth potential. Or you may prefer to focus more on international companies to take advantage of emerging markets.
If you don’t personally set your elections, many plans will auto-enroll you into a target-date fund, which is put together based on your projected retirement year. As you near retirement, target-date funds reallocate to become more conservative (i.e., fewer stocks, more bonds). A target-date fund adjusts with time but may not adjust to current economic and stock market conditions.
Take the Vanguard Target Retirement 2050 Fund, for example, whose current allocation is:
- Total stock market index fund: 53.3%
- Stock international index fund: 37.3%
- Total Bond II Index fund: 6.6%
- Total international bond II index fund: 2.8%
This allocation may work for some investors, but for others who want to make personal adjustments or focus on certain groups of stocks — such as international or large-cap ones — target-date funds don’t give them the freedom to do so. That’s why it’s important to have some of your money going into stand-alone funds that you can adjust as you see fit.
Review your contribution amount
A new year also means a fresh start for your 401(k) contribution limit. For the 2023 tax year, the 401(k) contribution limit is $22,500 ($29,000 if you’re 50 or older), a $2,000 increase from last year. You’re not obligated to max out your 401(k) — that’s a tough ask for many people. But at the bare minimum, contribute enough to get the maximum employer match if your job offers it. That’s as close to “free” money as it gets.
Finally, evaluate whether your current contribution percentage makes sense for you right now. Do you need to lower it to help cover higher expenses caused by inflation? Do you want to increase it so you can grab more shares for “cheap” right now? Are you good with where it’s at? Whatever the case, make sure your current contribution percentage makes sense for you financially.