Next year, Americans will be able to put much more money into their retirement accounts. But with inflation squeezing budgets, some savers may be reluctant to do so — without a nudge from their financial advisers.
On Friday, the Internal Revenue Service
The tax agency adjusts these caps every year to account for the rising cost of living, but next year's $2,000 jump is unusually steep. From 2019 to 2020, for example, the 401(k) cap only rose by $500. And from 2020 to 2021, it didn't rise at all.
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"We've never seen this big an increase," said Steve Azoury, a retirement adviser and owner of the Michigan-based firm Azoury Financial.
Individual retirement accounts got a boost as well. Next year, the annual contribution limit for IRAs will rise to $6,500, up from $6,000 in 2022.
While the new thresholds, which are indexed to inflation, create an opportunity for additional savings, they also reflect how rapidly prices are rising — and how much more money consumers may need to spend on monthly living expenses, not their long-term nest eggs.
"It's significant in two ways," said Frank O'Connor, vice president of research at the Insured Retirement Institute, an industry-funded trade group. "It's significant because it allows people to save more, but also because it's a wake-up call that inflation is back."
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For many workers, rising prices could make it harder to set aside any money for retirement, let alone save more. On the other hand, today's bear market could make it an especially good time to invest in one's 401(k), while stocks are cheap.
"When the market's down, you're buying more shares," Azoury said. "They're on sale … It's like Macy's after Christmas!"
The role of advisers
In the United States, the 401(k) is by far the most common type of employer-sponsored retirement plan. In total, 11.1 million Americans have a 401(k), with a combined $7.7 trillion in assets — several times more than any other defined-contribution plan, according to the
So the new contribution caps could affect a lot of people, but only if people take advantage of them — and Americans typically don't. In 2021, only 14% of U.S. workers with 401(k)s contributed the maximum amount allowed, according to one
Added to that is inflation, which is now at its highest in four decades. With gas and grocery prices soaring, many Americans may see an increased 401(k) contribution as an expense they can't afford.
"The knee-jerk reaction to this might be, 'Oh, great, they raised the cap, but I'm just hemorrhaging money here,'" O'Connor said. "'With prices rising the way they are, this isn't the time.'"
But since today's inflation will make retirement more expensive in the future, now is actually a crucial time to save more, advisers say.
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"Financial advisers can help clients see the big picture of their finances and encourage maximizing retirement plan contributions," said Lisa Featherngill, national director of wealth planning at Comerica Bank, headquartered in Texas.
If money is tight, advisers can help clients find areas for savings that they may have overlooked. The important thing, Featherngill said, is to "make the contributions a high priority" and build a budget around them.
O'Connor echoed that advice.
"This is what the adviser is there for," he said. "An adviser can say, 'Well, let's look at everything. Let's see where you're being impacted by inflation and where you're not, and let's see if there is any flexibility to be able to increase how much you're saving.'"
Above all, O'Connor said, the rising prices behind the cap increases should not deter saving. In fact, they should do the opposite.
"The fact that it is being increased as a result of inflation — that should be a really strong signal that it's more important now to save as much as you can," he said.
