Every year the IRS updates the rules on how much you’re allowed to contribute to your IRA and 401(k) accounts based on inflation and cost of living. Both of those accounts offer a great tax advantage, so the IRS limits how much you’re allowed to put in them.
Keep in mind, the updated contribution limit applies to other retirement plans through your employer as well. Like a 403(b), 457, and so on!
The 401(k) limit will increase by $500 to $23,000 next year. If you’re one of those ass kickers who is maxing out their 401(k), you might need to log in to your account and increase that by a bit for next year if you want to take advantage of every penny of tax benefit! Remember, the contribution limit is what you put in and does not take into account any employer contributions!
The IRA limit is going up by $500, which marks the second increase in the last two years! (before that it was stuck at $6,000 for a few years in a row). We will never understand why IRA contribution limits are so much lower than employer retirement plan limits. It doesn’t make sense to punish people who don’t have access to an employer plan. BUT we don’t make the rules so we must play by the rules we are given and use the tax favorable accounts that are available to us!
One more reminder: IRAs and 401(k)s are just special types of brokerage accounts. A brokerage account is just an account in which you invest (by buying stuff like index funds). You can always contribute an UNLIMITED amount to a brokerage account. People get worked up over IRAs and 401ks because of the tax breaks. You should take advantage of them. But when the tax breaks end, that doesn’t mean investing should stop. Dump the rest of your savings into a brokerage account and let that sucker grow. They only tax you on what you make when you sell! :)
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.
-Vivi & Shane
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