IF YOU WORK AT a midsized or large employer, you might be offered a 401(k), 403(b) or 457 plan. In general, private sector companies offer 401(k) plans, nonprofit and educational institutions offer 403(b) plans, and government organizations offer 457 plans. All operate under roughly similar rules.
The contribution limit for these plans is typically $20,500 in 2022 and $22,500 in 2023. Those age 50 and up can make an additional catch-up contribution of $6,500 in 2022, for a total of $27,000, and $7,500 in 2023, for a maximum invested of $30,000. Any matching employer contribution doesn’t count toward these annual limits. Some companies also offer profit-sharing plans, which are funded solely by the employer, with no money expected from you.
If you work for a small employer, you might have access to a SIMPLE IRA. (SIMPLE is an acronym for Savings Incentive Match Plan for Employees.) The contribution limit is $14,000 in 2022 and $15,500 in 2023. Those 50 and up can contribute an additional $3,000 in 2022 and $3,500 in 2023, for a total of $17,000 in 2022 and $19,000 in 2023. Employers are required to either contribute 2% of an employee’s pay to a SIMPLE IRA or, alternatively, match 100% of each employee’s contribution, up to 3% of pay.
If you’re self-employed, you could fund a SEP-IRA. (SEP stands for Simplified Employee Pension.) You can contribute as much as 20% of your net self-employment income, up to $61,000 in 2022 and $66,000 in 2023. You can make this contribution even if you are covered by, say, an employer’s 401(k) at another job. Alternatively, if you’re self-employed, you might consider a solo 401(k), where the total contribution that you can make, as both employer and employee, is also capped at $61,000 in 2022 and $66,000 in 2023. On top of that, those 50 and older can make a $6,500 catch-up contribution in 2022, for a total of $67,500, and $7,500 in 2023, for a maximum $73,500.
For most folks, funding their employer’s plan should be their top financial priority each year, not least because of the potential matching employer contribution. Failing to contribute isn’t the only danger, however. You should also watch out for high costs and pay heed to vesting provisions if you’re considering a new job. In addition, think twice before taking out retirement plan loans.
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