The IRS raises the retirement savings cap for 2023, but few even reach it.  Here's what you can do about it.

Most of the news on inflation was badbut retirement savers may have been well-paid – if they are savers and if they can afford to take advantage of it.

Last month, the IRS raised the limit on how much people can put into tax-deferred retirement accounts by a record amount, largely due to rising inflation.

But here’s the kicker: Only 14 percent of employees who participate in company pension plans contributed to the IRS limits last year, according to Vanguard.

Add inflation for four decadesand 54% of 1,000 Americans surveyed by Allianz Life in September said they had stopped or reduced retirement savings.

And that’s even as people’s expectations rise about how much they need to retire comfortably ($1.25 million now, according to a recent Northwestern Mutual study, up 20% from last year), people are saving more a little.

“I think what’s going to happen is that those who are maxing out right now are going to benefit from the new limits, but that’s only a small fraction of the people who are contributing to their retirement plans,” said Kelly Lavin, vice president of consumer insights at Allianz Life.

But that doesn’t have to be the case, if people follow the steps of budgeting and saving, they too can switch to tax-free earnings growth.

What are the 2023 401(k) Limits?

In 2023, employees participating in company pension plans can contribute $22,500 to their 401(k), up $2,000 from last year. Those not in an employee-sponsored plan will be able to contribute $6,500, compared to $6,000, in an Individual Retirement Account (IRA).

Furthermore, catch-up contribution the limit for employees age 50 and older increases to $7,500 in 2023 from $6,500 in 2022. That means those participants will be able to contribute up to $30,000 in total. However, the catch-up IRA contribution limit will remain at $1,000, the IRS said.

What is a 401(k) and IRA and what is the difference?

A 401(k) is a retirement savings plan offered by companies to employees. Many companies also match, meaning they’ll contribute the same amount you do toward retirement, usually up to a certain amount. Only your contributions count toward the IRS cap, so matching can increase your total savings above the IRS cap and is what advisors call “free money.” So at least contribute enough to get the full match if you can, advisers say.

Contributions are taken from your pre-tax salary, so this also reduces your taxable income. You only pay taxes on withdrawals, so your money grows tax-free while it’s in your 401(k).

IRAs are opened by individuals through a brokerage firm or bank. Depending on your income and filing status, all or part of your contributions may be deductible in whole or in part, making this investment also tax-advantaged. Only withdrawals are taxed.

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How do people feel about retirement?

Nervous but still not saving properly.

Last year, nearly 70% of people surveyed by Invesco said they feared running out of money after retirement.

Americans’ average retirement savings fell 11 percent to $86,869 from $98,800 last year, while the expected retirement age rose to 64 from 62.6 last year, the survey said.

Why aren’t people saving more for retirement?

There is many reasons.

“People like to live in the moment, and retirement is too far away for many to think about and plan for,” said Brian Snow, who invests and saves with his investment club BetterInvesting.

Many consumers must direct their money elsewhere, thanks to inflation that “has outpaced growth in average hourly earnings and squeezed household budgets, and limited capacity to grow retirement savings is a byproduct of that,” said Greg McBride, chief financial analyst at Bankrate.

Others lack the financial know-how or discipline.

Salary isn’t “the only factor why people don’t reach the 401k max,” said saver Byron Williams. “The question is not how much one makes, but rather what one does with what one makes.”

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How to start saving?

Start with budgetadvises Akari Muhisani, who credits the “Jesus moment” of 2008 for launching his savings plan.

“I had $25,000 in credit card debt and I didn’t want to be broke and living paycheck to paycheck like my mom,” Muhisani said.

He began applying additional money to his debt, the smallest balance first. Within two years, Muhisani paid off his credit card balance.

Then he started saving, setting aside 10% of his income for his future. Now he has emergency savings about three to six months of living expenses and retirement savings. If he has money left over at the end of the month, he adds more to his savings or maxes out his 401(k).

Williams contributes a percentage of his annual raises to his 401(k).

“Some years I took the entire raise and put it in a 401(k), forcing me to live on the same salary I was living on the year before,” he said. “It’s not rocket science, but rather it’s based on knowing the power of maxing out your 401(k) and having the discipline to do it.”

Some advisors suggest investing your tax refundtoo.

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How do you increase your savings?

Invest it – early.

“Too many people delay and don’t invest early,” Snow said.

Early is key mixingmeaning that the earnings from your savings are reinvested to generate their own profits, allowing for exponential growth.

If you can’t save the recommended 12% to 15% of your annual income, then “save at the level you can,” said Matt Fleming, a wealth advisor at Vanguard Personal Advisor Services. “Later, increase contributions by 1%-3% per year to reach your goal.”

And it’s better to automate savings so they are deducted monthly from your paycheck or bank account in your 401(k) plan or other retirement fund.

You’ll be putting your money to work as you earn it, which will buy you more time for compound growth.

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But how do you invest it?

Investing can be intimidating with so many numbers, options and tax implications. Some people turn to financial advisors. Muhisani joined an investment club.

“Investment clubs are great for meeting regular people, retirees who are doing this — man, they’re so smart and they’ve never studied this before,” he said, noting that the Beardstown Ladies club inspired him. “They are regular ladies who invest in the market and are always on top of CNBC’s investment challenge.”

There, he says he learned about the company’s financial statements, valuations, funds, fees, pension funds and more, and put his savings into about $1 million in total retirement money.

Education will be the first step, Williams said. “Making sure people really understand the 401(k), its benefits and how to use it is key.”

Medora Lee is a money, markets and personal finance reporter for USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal financial tips and business news every Monday through Friday morning.

This article originally appeared on USA TODAY: The IRS is raising retirement savings limits, but few are reaching them. Here’s how you can

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