10 Tips for Maximizing Your Financial Plan in 2023: Tip 1- 401ks and 403bs

Hello, Matt Blocki with EWA. Today we are talking through 10 tips for 2023 and how to maximize your financial plan. First tip for maximizing your financial plan in 2023 is to make sure that you have your 401k or 403b fully maxed out.

So this was one of the biggest inflationary good pieces of news that we’ve seen year to date. And this is one of the biggest increases that we’ve seen in the IRS allowing for bigger contributions in the retirement plans.

Again, a 401k or 403b is something that’s asset protected, it’s very tax efficient, there’s a reason there’s a cap on it. So generally speaking, if you’re in a higher income household, this is something that we would recommend to be prioritized to fully maximize.

So the first thing to note is there’s something called a 415c limit and this is the total, the combination that can go into a 401k or 403b plan for the year and this is between your contributions, your company’s contributions, whether those are a match or a profit share.

If you’re below the age of 50, the total that can go into 66 ,000. If you’re above the age of 50, the total that can go in is 73 ,500. So let’s break this down in detail. So the first thing that most people are aware of is what’s called a 402g limit.

The 402g limit is what you can put in. This is either a Roth election where you pay the taxes now and then it’s all tax -free growth and tax -free later after the age of 59 and a half or you can do a pre -tax election where you save the taxes now, it’s non -taxable contributions, it still grows tax -free, but then it gets taxed fully on the way out.

The Roth can be rolled to a Roth IRA, the pre -tax can be rolled to a traditional IRA. The pre -tax account, whether it’s left in or rolled out to a traditional IRA, does have required minimum distributions, meaning at the age of 72, it’s being talked about to bump that up, potentially all the way to age 75, we’ll see if Secure Act 2 .0 passes.

But to note the pre -tax, this is not just a tax conversation, this is a control conversation. The government’s gonna force you to take out of that account every year, whether the market’s up or down.

So generally speaking, regardless of someone’s tax bracket now, we do like to have Roth in the mix, so you have some optionality in retirement. But regardless, between these buckets in 2023, significant increase here.

In 2022, it was 20 ,500 that could go in. In 2023, it’s 22 ,500. So basically a 10% increase, amazing. Obviously inflation was almost 9%, but big, big increase you can do, and we’d recommend taking advantage. Now for those of you with a few more gray hairs, this is actually 30 ,000 that can go into this category.

So we’re gonna start this column over here, 50 plus. So a total of 22 ,500 plus a catch -up contribution of 7 ,500. So the total that can go in to that 402G election is 30 ,000. Very important to note, for this 402G limit, you can only have one 402G contribution per year per social security number.

If you have another business or a side business on top of your day job, you can actually have multiple 401Ks, and you can structure every 401K to hit the 4015C limit. But this first category of how to get the 66 ,000 in there, if you’re under the age of 50, you only have one 402G limit.

So the second 401K if you had them, you’d have the hit between these three categories. This would be marked off as complete in your day job. Okay, second category is the employer match. So let’s just say hypothetically that this person is making $200 ,000, and the match is 3%.

So this would be $6 ,000 per year that would go in, irregardless if you’re before 50 or after 50, $200 ,000 income, 3% match would be $6 ,000. So the other two, and some companies, probably the majority of companies that we work with, you would be stopped here, even though the limit is 66, you’re gonna put in this 22 ,500, they’re gonna match 6 ,000, and that’s all that can go in.

However, some companies are generous and give what’s called a profit sharing contribution. That could arrange, that could be the difference to get you to that full amount. If you’re like a partner at a physician practice, a law firm, we see that’s very common.

If you’re a W -2 employee of a company that has thousands of employees, most likely this will not be offered, it will mostly be a match, maybe more generous than 3%, most likely a profit sharing contribution will be allowed.

Let’s say hypothetically this is also 3% of 200, that’s another 6 ,000. So 22 ,500 plus six plus six, that’s 34 ,500. That leaves an additional 31 ,500 that can be put in. So then we’re at the saving grace of potentially your 401k allowing for an after tax contribution.

So just to do some quick math in my head again, that’s 31 ,500 that could still go in. And the nice thing about the after tax account, if you put the money in and you just let it sit there, the basis will be taxed for and you retire but all of the growth will be taxed and subject to requirement of distributions and taxed at your income rates, not capital gain rates.

So the only reason we’d recommend doing the after tax is if a Roth conversion is allowed inside or outside of the plan. So if we can take that 31 ,500 and roll it into an individual Roth IRA, this is one of the best things available in the world of financial planning.

Or if we can even convert that into that Roth inside the plan, an amazing opportunity, it’s called a mega backdoor Roth because you could put in the 22 ,500 in this example plus an additional 31 ,500 into the Roth, quite amazing.

But only a mechanic would recommend to take advantage of if that in -plan conversion is allowed. So again, under the age of 50, this is just an example of how you could reach that 415C limit of 66 ,000. Over the age of 50, we can get to a total of 73 ,500.

These numbers would actually be the same because that increase actually shows up here in that 402G section. So in that example, the match, the profit share, the after tax, all of those would be the same to arrive at those numbers.

Please reach out if you have any questions but for the majority of people watching this video that are W2 employees, the big thing to note will be this 402G limit. Make sure we adjust the percentages or dollar amounts to hit the maximums.

And then for business owners, partners, those that have the profit sharing, the ability to do an after tax contribution, we need to adjust this section plus the after tax. These other two sections, you’re at the mercy of your employer offering those matches and offering those profit shares.

Nothing you need to do. But the rest, we need to keep our close eye on and make sure that you’re on track to max out.