Page 21 - BusinessWest December 12, 2022

Saving Grace
New Cap Announced on Retirement-plan Contributions
By Barbara Trombley, MBA, CPA
The Internal Revenue Service has announced one of the biggest jumps in decades to the cap on 401(k) contribu-
tions. Americans will be able to save 10% more in their plans by making pre-tax contributions if they take full advantage of the new cap. The new limit is $22,500, up from $20,500 in 2022, and is applicable to all 401(k), 403(b), and other tax-advantaged savings plans.
Remember, a pre-tax contribution to a plan lowers your taxable income by the same amount in the tax year the contribution is made. The new caps also apply to Roth 401(k) or post-tax con- tributions (if your plan allows). The tax benefits to Roth 401(k) plans do not occur in the year the contribution is made, but later, when distribu- tions are taken tax-free after the age of 591⁄2.
If an employee is age 50, they can also make
a catch-up contribution. This limit has increased to $7,500 from $6,500 in 2022. This means
an employee over the age of 50 can put up to $30,000 in their retirement plan this year with federally approved tax benefits. The IRS seems to be responding to the wave of inflation that has impacted the world and is encouraging Ameri- cans to save more for retirement.
Contribution limits to traditional IRAs and Roth IRAs will increase $500 to $6,500. Catch-up contributions to those over age 50 are not sub-
ject to annual cost-of-living increases and will remain at $1,000. If the taxpayer is not covered by a retirement plan at their place of employment, traditional IRA contributions are fully deductible. If the employee
is eligible for a
retirement plan
at their place of
employment,
then the deduct-
ibility of a tradi-
tional IRA contri-
bution is subject
to earnings limits
that can be found
on the IRS web-
site. The contri-
bution may be fully, partially, or not deductible. Income limits also apply to the eligibility of Roth IRA contributions if the employee is covered by a retirement plan at work.
Building a robust retirement plan takes time but is imperative to supplement Social Secu- rity or pensions in retirement. Taking risks at a younger age by investing mostly in equities has historically been the best way to beat inflation and take advantage of compounding.
Compounding occurs when investments in assets generate earnings, and those earnings
are reinvested, and they generate earnings. For example, a $10,000 initial investment that gen- erates 10% annually for 25 years would grow to almost $110,000.
Many contributors wonder about the future
of Social Security; this future will have to be addressed someday by our government. Cur- rently, according to the Social Security web- site, the trust fund will run out in 2037.
Strive to save at least 10% of your paycheck in a workplace retirement plan to build a nest egg to supplement other streams of income in retire- ment. Diligently saving and investing over a long period of time by making regular, monthly con- tributions into a retirement plan that includes the appropriate allocation of equities for your age is a great way to save for the future.
Speaking of Social Security, most people have heard of the large
“
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BusinessWest
BANKING & FINANCE
DECEMBER 12, 2022 21
cost-of-living increase coming in
Save
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