Early retirement may be a dream for some, but you could make it a reality.
With 2022 in the rearview mirror, there are a few things you can do to set yourself up for success going forward. It was a rough year for investors, but that presents some unique opportunities. And those focused on early retirement may have more opportunities than the average saver.
Here are four things you can do to get ahead in 2023.
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1. Boost your retirement contributions
After staggeringly high inflation rates in 2022, the IRS raised the 2023 contribution limits for tax-advantaged retirement accounts.
There are several different types of accounts you might use to save for retirement, and the table below shows all the changes.
Account
2022 Limit
2023 Limit
401(k), 403(b), 457
$20,500
$22,500
IRA
$6,000
$6,500
HSA (individual/family)
$3,650/$7,300
$3,850/$7,750
Table source: Author. Data source: IRS.
One of the best ways to get ahead on early retirement is by maxing out your retirement account contributions. In order to max out your 401(k) (and HSA, if you’re eligible and it’s offered through your employer), you’ll need to update your salary withholdings.
A best practice for employer-sponsored plans that offer a matching contribution is to spread out your contribution evenly throughout the year. Front-loading to start the year may produce a higher return on average, but you could miss out on your employer match if you don’t contribute from every paycheck. You can check with human resources when you go to update your salary deferral plans.
2. Consider tax loss harvesting
After the bear market caused both stocks and bonds to drop in value, you may be able to sell some investments at a loss in order to gain a tax benefit.
The idea of tax loss harvesting is to purposely show a loss on paper by selling assets that have gone down in value. You then reinvest that money into a similar asset, effectively keeping your portfolio the same.
You can then deduct those losses from any capital gains you might have. You can also use up to $3,000 in losses to offset your regular income each year. Any losses you don’t use in a given year carry forward to future years.
The one thing to watch out for with tax loss harvesting is the wash sale rule. The wash sale rule says if you buy the same (or a substantially similar) asset within 30 days of its sale (either before or after), it’s as if the sale never happened.
3. Consider a Roth conversion
Roth conversions can help you save on taxes long term and give you access to your retirement savings early.
Right now may be an opportune time to convert traditional retirement accounts to Roth accounts. You’ll owe taxes on the amount you convert, but that amount is probably less than it was 12 months ago.
Once converted, your investments are able to grow tax-free until you’re ready to withdraw the funds. Careful tax planning can help you save money in the long run by making timely conversions.
The other benefit of a Roth conversion is that you can actually access your funds early. Any amount you convert to a Roth account can be withdrawn after five years without penalty. You don’t have to wait until age 59 1/2 to access those savings. So, if you plan to retire in five years or so, making those Roth conversions today can set you up to have more of your savings available down the road. And that withdrawal will be tax-free, to boot.
4. Assess your risk tolerance
You don’t want to make a plan only to realize you’re incapable of following it.
The current market presents a great opportunity to assess how much risk you’re truly able to withstand. If you’ve continuously thought of selling every investment you own, you may be too heavily invested in risky assets. It’s normal to feel stressed about your portfolio in a bear market, but you shouldn’t be running for the hills.
If you’ve been struggling to stay the course, maybe it’s time to change courses. Build a plan you’re more confident you can stick with in the next market downturn.
If you end up selling all your investments and sticking with cash, the chances are slim you’ll ever retire, let alone retire early.
The best time to get ahead
Even if you’re starting your retirement savings journey late, 2023 presents plenty of opportunities for you to grow your savings and save on taxes. With some smart planning, you’ll be set to make the most of 2023 for your retirement goals.
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