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4 Ways To Make Your 401(k) More Profitable: Where To Invest

The recent headline about the IRS allowing 401(k) investors to contribute more money in 2023 is a dual-edged sword: More money for retirement is great, but where do you put those extra dollars?

Here’s the good part: Since the IRS adjusts 401(k) contributions to inflation, it’s allowing Americans to sock away $22,500 in 2023, up from $20,500 for 2022. The limit on annual contributions to an IRA increased to $6,500, up from $6,000. The IRA catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains at $1,000.

For those who are 50 and older, the catch-up contribution limit for employees is increased to $7,500, up from $6,500. Those who participate in SIMPLE plans can invest $3,500, up from $3,000.

Now here’s the hard part. With the stock market in a bipolar mood, inflation and interest rates still lofty, where’s the best place to invest?

  1. Stock index funds. Yes, definitely. Buy when share prices are low or just keep investing year-round. You’re often getting more shares at a discount. Purchase “total market” funds that invest in a broad basket of stocks at the lowest possible price. You may not feel good buying on the dips, but you’re going to be happy when the market rebounds.
  2. Money-market funds. Unlike regular bonds and bond funds, you get higher yields as interest rates rise. These funds are great for short-term money and emergency savings. Don’t put most of your eggs in this basket, though! Invest in funds that have little or no expenses. You need an emergency fund at all times, so this is the vehicle to keep replenishing.
  3. Floating-Rate Funds. Like money-market funds, these vehicles can grab higher yields when rates rise. Professional managers pick the best securities.
  4. Real Estate. Now’s a good time to build equity in your own home. In many areas of the country, there’s a paucity of starter homes, so when you decide to relocate or downsize, you will find willing buyers. While there’s no guaranteed return on investment, any improvements you make you can enjoy now. You can also pay down your mortgage to build equity, which you can borrow against at a later date — if you need it.