401(k) Contribution Limits 2023: All You Need to Know

401(k) Contribution Limits 2023: If you participate in a 401(k) retirement savings plan at work in 2023, the maximum amount you can contribute is $22,500. However, if you are 50 or older, you can make an additional $7,500 catch-up contribution for a total of $30,000. These limits also apply to 403(b), the majority of 457 retirement plans, and the Thrift Savings Plan of the federal government.

The Internal Revenue Service (IRS) imposes an annual cap on the amount of your personal contributions to your retirement plan savings, also known as your salary deferral. The limits for 2023 are greater than those for 2022 due to inflation and cost of living adjustments made by the IRS in October 2022. Additionally, the IRS imposes compensation limits to regulate the amount of employer contributions and to classify certain categories of highly compensated employees.

These strategies may be more intricate than they initially appear. Continue reading to learn the specifics.

Navigating Personal Finances as a Business Owner: Balancing Act

401(k) contribution limits 2023

The individual contribution limit for 2023 differs for workers under 50 and those 50 and senior. The IRS imposes maximum contribution limits to promote the equitable participation of all employees in 401(k) plans.

Limits on deferred compensation for all employees under 50 years of age. You may contribute as much as $22,500 to your employer’s 401(k) plan in 2023.

Limits on deferred compensation for employees 50 and older. You may contribute an additional $7,500, bringing your total contribution to $30,000.

Note: Contributions to a traditional IRA ($6,500 or $7,500 for those 50 or older in 2023) are not included in the above limits. In 2023, the same rule applies to deferrals of $22,500 under a 457(b) plan ($30,000 if you are 50 or older).

Contribution maximum for employees under 50. If you are under the age of 50, you may contribute a maximum of $66,000 to your 401(k) plan, including salary deferrals, Roth 401(k) contributions, employer contributions, and personal non-deductible (not Roth) contributions, if permitted by your plan.

Contribution maximum for personnel 50 and older. If you are 50 or older, the utmost contribution is $73,500, including catch-up contributions of up to $7,500.

Suppose you had a 401(k) with one employer, departed that job in 2023, and opened a 401(k) with a second employer. In 2023, the $22,500 limit would apply to all of your contributions to both plans. Similarly, the $66,000 ($73,500) limit applies to total contributions made to 401(k), 403(b), and the majority of 457 plans this year.

401(k) compensation limits 2023

401(k) Contribution Limits 2023: To ensure the equitable participation of all employees who participate in 401(k) plans, the IRS also establishes annual compensation limits. Here is what you must know about the year 2023.

Limit on employee compensation. For 2023, your employer can only consider up to $330,000 in compensation when determining its contribution to your 401(k) plan, whether through matching contributions or direct contributions.

HCEs are highly compensated employees. If you own more than 5% of the company that employs you or earn more than $150,000 in compensation in 2023, you are considered a highly compensated employee (HCE) and are subject to non-discrimination tests to ensure you do not enjoy a tax-saving advantage over non-HCEs.

Key personnel. If you are a 5% owner, 1% owner who receives more than $150,000 in compensation, or an officer who receives more than $215,000 in compensation, you are considered an essential employee and subject to nondiscrimination tests.

Depending on ownership and/or compensation, key employees may also be HCEs.

The following table summarises contribution and compensation limits as well as employee classification definitions for 2023.

*The age 50+ catch-up and “all sources” sums are applicable to anyone who reaches age 50 during the tax year.

401(k) Roth contribution limits

Your contribution limit includes contributions made after taxes to a Roth 401(k) account. Unlike Roth IRA contributions, Roth contributions to a 401(k) are not subject to a minimum income requirement. As with a Roth IRA, however, qualified withdrawals (including contributions and earnings) are tax-free.

Employers Payments

Employers must base their contributions on compensation of at least $330,000 and are subject to a limit of $66,000 ($73,500 if you are 50 or elderly) minus your contributions. Any allocated forfeitures and nondeductible contributions must also be deducted from the maximum amount.

401(k) contribution limits when you have multiple 401(k) plans through various employers

The $22,500 or $30,000 annual contribution limit for 2023 applies to all 401(k) accounts. If you contributed to three 401(k) accounts in 2023, you cannot contribute more than $22,500 ($30,000 if you are 50 or older).

Limits for highly compensated workers

401(k) Contribution Limits 2023: Highly compensated employees (HCEs) and essential employees have the same personal contribution limits as non-HCEs in 2023, depending on age: $22,500 or $30,000, respectively. However, the IRS requires businesses to conduct three nondiscrimination tests annually to prevent HCEs or critical employees from receiving a greater 401(k) benefit than non-HCEs.

• ADP exam. If the actual deferral percentage (ADP) of HCEs is more than 2 percentage points higher than that of non-HCEs, the plan fails and must be revised.
• ACP exam. If the actual contribution percentage (ACP) of highly compensated employees (HCEs) is more than 2% higher than that of non-HCEs, the company’s 401(k) plan fails the criteria and must be corrected.
• Top-heavy examination. A plan is top-heavy if, as of the last day of the prior plan year, the total value of the plan accounts of key employees exceeds sixty percent of the total value of the plan’s assets.

Correcting these test failures is outlined in your 401(k) plan’s regulations and, in the case of ADP and ACP tests, may involve refunding excess contributions to HCEs in the amount required to pass the tests. These refunds are liable to taxation and have been removed from the HCEs’ 401(k) plan. Some companies conduct mid-year ADP/ACP test projections to enable HCEs to adjust their contributions to avoid the need for corrections.

When a plan fails the top-heavy test, the employer must contribute up to 3% of non-key employees’ salaries as of the last day of the plan year. The vesting schedule for this contribution stipulates that participants must be fully vested after three years.

Contributions exceeding Annual Caps

If your personal contributions to your 401(k) plan, including Roth contributions, exceed $22,500 in 2023 (or $30,000 if you are 50 or older), your employer must take corrective action to return the excess contributions to you by April 15, 2024. Additionally, any earnings generated from these contributions must be returned. You must include the excess contributions in your total income and pay taxes on them, along with the earnings, on your tax return for the year 2023. Unlike earnings, excess Roth contributions are not subject to taxation.

If you fail to obtain your excess contributions and earnings by April 15, you will be taxed twice: once on your 2023 tax return and again on your 2024 tax return. As with pre-tax contributions, excess Roth contributions must be returned, but will only be taxed when distributed.

401(k) Contribution limits after taxes

If your 401(k) plan allows Roth contributions, Roth 401(k) contribution limits for 2023 are included in the $22,500 ($30,000) regular personal contribution limit. If your plan permits after-tax (non-Roth) contributions, they are not subject to the $22,500 ($30,000) individual limit and can be used to supplement your employer contribution up to $66,000 ($73,500).

Under the age of 5912, early withdrawals of after-tax 401(k) contributions are still subject to a 10% penalty. And, unlike with a Roth 401(k) plan, proceeds on after-tax non-Roth 401(k) contributions are subject to taxation upon withdrawal. Empower’s financial advisors can help you determine the optimal withdrawal strategy to minimise taxes during retirement.

How much money should you put into your 401(k)?

First, if possible, you should contribute enough to your 401(k) to take advantage of your employer’s full match, if one is offered. In addition, experts recommend that you contribute between 10 and 15 percent of your annual income. After that, it’s a question of maximising the return on your retirement savings. This may include your 401(k), traditional IRAs, Roth IRAs, as well as taxable investment accounts. Playbook can provide guidance on how to maximise tax-advantaged retirement accounts such as these.

How to maximise contributions to your 401(k)

Here are some simple strategies that can help you maximise your 401(k) contributions.

Increase your rate of savings. Many 401(k) plans have a default savings rate of 3%, but you can set your own savings rate (within IRS deferral limits, of course) and increase it as you see fit.

Benefit from employer matching. Numerous employers offer matching contributions up to a certain amount or percentage. Identify your employer match and ensure that you receive every cent of this “free money.”

Don’t leave before you’re fully invested. Your employer match likely comes with a requirement that you must remain with the company for a certain number of years before you are allowed to retain the employer match. Ensure that you understand the rules and consider them when planning career moves.

Take the tax credit for savers. In addition to your pre-tax 401(k) contributions that reduce your taxable income, you may be eligible for an additional tax credit of $1,000 for individuals or $2,000 for couples, which represents 50% of a maximum contribution of $2,000 or $4,000, respectively. To be eligible for the full 50% (the credit phases out based on income), your adjusted gross income (AGI) must be $43,500 or less for joint filers and $21,750 or less for single filers.

Add a Roth-designated 401(k). Inquire whether your employer offers a Roth 401(k) or allows after-tax contributions to non-Roth accounts. Either one can help you increase your savings, and non-Roth after-tax contributions are not subject to the $22,500/$30,000 personal limit. You may be able to split your contribution between the two varieties of 401(k)s, depending on your company’s plan.

Know the location of your 401(k) accounts. Beagle, a corporation specialising in locating lost 401(k) accounts, recommends contacting former employers in order to locate lost accounts. Check previous 401(k) statements to locate the HR department of the company. There are databases of “unclaimed assets” that may also contain clues. Obviously, use caution with your Social Security number when conducting this research.

Other methods of retirement savings

Don’t neglect to include your Social Security benefits and pensions when calculating your retirement income. Then, in addition to your workplace 401(k), consider other ways to increase the size of your retirement portfolio. Using an online tool like Empower, you can set strategies and receive assistance with retirement planning.

IRA stands for individual retirement account. There are two primary IRA types: traditional and Roth. Both offer tax benefits. Moreover, IRA contribution limits ($6,500/$7,500 for those over age 50) are in addition to 401(k) limits.

An HSA is a health savings account. One underutilised savings plan is the HSA, which can be used to pay for retirement healthcare costs. Contributions to an HSA are tax-deductible, and withdrawals for qualified medical expenses are tax-free. In 2023, the limits are $3,850 for individuals and $7,750 for families, with an additional $1,000 for those 55 and older. (Note that you must have a high-deductible health plan to contribute to this account, which may not be suitable for everyone.)

Account for taxed investments. After exhausting tax-advantaged savings opportunities, it is always possible to invest after-tax funds. This can include a brokerage account, which does not offer tax advantages or tax-free development but does provide significantly more investment opportunities than the majority of 401(k) and IRA plans.

Investing in tax-deferred annuities. Annuities from insurance companies provide tax deferral, investment options, and a fixed payout for a set number of years or even for life. There is no maximum quantity that can be invested in an annuity.

Real property. Opportunities vary from rental housing to real estate investment trusts (REITs). Real estate can provide retirement income stability, capital appreciation, or both.

A 401(k) with an employer match is an outstanding retirement savings vehicle.

The IRS controls the amount you can contribute to a 401(k) plan. For 2023, you may not contribute more than $22,500, or $30,000 if you’re 50 or older. Other limitations also apply, including your employer’s contribution limit.

The fact that your employer can match your contributions (within certain limits) is what makes 401(k) plans so appealing. For the majority of people, taking advantage of this “free money” is a no-brainer. If you have contributed the maximum amount to your 401(k) or the maximum amount that can be matched, you should consider other options to help you reach your total savings objective.

FAQs

In 2023, did 401(k) limits increase?

Yes. Individual contribution limits for 401(k) plans increased to $22,500 in 2023, a $2,000 increase from 2022 for those under age 50. If you are 50 or elderly, you can contribute up to $30,000 annually.

If I have a 401(k), am I eligible for the Saver’s Credit?

It’s possible. Income-eligible taxpayers who contribute to employer-sponsored 401(k), 403(b), and certain other retirement savings plans are eligible for the saver’s tax credit. In order to receive the maximum 50% tax credit in 2023, single filers must have an AGI of at least $21,750, while joint filers must have an AGI of at least $43,500.

Does the 401k contribution maximum include employer contributions?

Your contribution limit does not include employer matching contributions. There is a limit on contributions from all sources, which includes both employee and employer contributions to your 401(k) account. In 2023, the limit from all sources will be $66,000 for those under 50 and $73,500 for those over 50.