The Internal Revenue Service (IRS) announced the largest-ever increase in 401(k) contributions, thus allowing Americans to save more money for retirement in tax-deferred accounts.
However, the data suggests only a small number of Americans will be able to save more money for retirement, due to surging inflation and the increasing cost of living.
Americans Can Now Save More for Retirement
As per the revised IRS regulations that will be applicable from 2023, Americans can contribute up to $22,500 in their 401(k) accounts.
In 2022, the 401(k) contribution limit was $20,500. The $2,000 jump in a single year is the largest since 2007, when the limit was only $15,500.
IRS increases 401k contribution limit to $22,500 in 2023.
— David | Filled With Money (@FilledWithMoney) October 21, 2022
Usually, the IRS increases the 401(k) account limits every year. However, in times of chronic inflation, when the cost of living is increasing unprecedentedly, the tax watchdog is now increasing the account limits even more significantly.
In September, the Consumer Price Index jumped by 8.2%, which suggests an alarming rise in inflation even though the Biden administration established inflation already touched its peak.
Despite the availability of 401(k) accounts, only a small number of Americans manage to use these accounts to their full limits. According to a report by the Congressional Research Service, only 8.5% of Americans touched the upper limit of 401(k) accounts in 2018.
Furthermore, the IRS also increased the limits of Individual Retirement Accounts (IRAs) to $6,500 for 2023. In 2022, the upper limit for IRAs was $6,000. For Americans above 50 years of age, the new IRA limit is set at $7,500.
Rising Inflation Discouraging Americans From Saving Money
Even though the revised IRS regulations are seeking to accommodate the increasing cost of living for 401(k) accounts, reports suggest most Americans are saving a minimal amount of money for their retirement.
Almost 25% of Americans have no retirement savings, as per the data of an accounting firm, PwC.
The PwC report further asserted Americans between the age of 25 and 64 have an accumulated savings deficit of $3.68 trillion, which means that they are vulnerable to unsafe retirement.
IRS makes the largest ever increase to the 401k contribution limit — just at the time when no one actually wants to look at their 401ks https://t.co/eJOIKVurJv
— Emily Peck (@EmilyRPeck) October 21, 2022
Likewise, the Federal Reserve noted the median retirement balance was only $65,000 in 2019 in America.
Whereas the latest changes can help upper-class Americans to save more for their retirement. Apart from increasing the 401(k) limits, the IRS has also introduced some other changes in tax laws by adjusting rising inflation in the taxable income.
Now, the IRS has brought new tax brackets. Those Americans who would not get a raise in 2023 will need to pay a little bit less tax next year, compared to what they paid in 2022. Though the top tax rate will be maintained at 37% in 2023.
At the rate things are going, it remains to be seen what other choices the IRS decides to make. With the economy being in such an unpredictable state, just about anything is possible.