401k plans make up the bulk of many retirement savings strategies across the country. Each year, there are potential changes to the maximum contributions you can make to your retirement savings, and 2023 is no exception. Let's explore the differences you can expect in contribution limits for 2023 compared to 2022 maximum contributions.
Brief 401k Overview
A 401k plan is an employer-sponsored retirement plan that allows workers to invest a portion of their pre-tax earnings toward their retirement savings. When employees do this, that money goes untaxed until it gets withdrawn from the account.
Initially, these plans were intended to supplement employer pension plans. Today, though, few employers offer pension plans. While some employers provide matching contributions, up to a percentage of their employees' salaries, not every employer does this.
The IRS has strict limits for the amount of money an employee can contribute to their 401k plan, leaving some employees looking for other retirement savings or investment options. Despite these contribution limits, the 401k remains the primary source of retirement income and investment for many workers today.
2023 Contribution and Income Limits
With 2023 401k contribution limits, there are a few different limits to consider. First, there is the pre-tax contribution limit. For 2023, the maximum amount of pre-tax dollars most employees can contribute to a 401k plan is $22,500.
That is a $2,000 increase over the 2022 maximum contribution of $20,500 and reflects the inflationary pressures on today's economy.
Current 401k rules allow employees aged 50 or older when the calendar year (2023) ends to begin making what it calls "catch up" contributions.
This year, the pre-tax contribution limits for catch-up contributions are also increasing to $7,500. What it means, though, is that if you are over 50, you can contribute up to $30,000 instead of being limited to the standard $22,500 maximum contribution.
Some 401k plans allow employees to make after-tax contributions to their 401k plans in addition to their pre-tax contributions. For the 2023 calendar year, the maximum after-tax contributions employees can make to their retirement plans are $66,000 or 100 percent of their total compensation (whichever is the lower total). That's an increase of $5,000 from 2022.
Contribution limits do not include contributions made by an employer, often rendered as a percentage 'match' to what the employee contributed. So that is 'free' money going into your retirement account that does not count toward your contribution limit. If you remain with your employer, those numbers can add up quickly.
Types of 401k Plans
While most people think of a 401k plan as one type of retirement plan, the truth is that there are multiple options for types of 401k plans. Since it is an employer-sponsored retirement plan, you may have access to only one or a couple of the following types of 401k plans:
- Traditional 401k
- Safe harbor 401k
- Simple 401k
- Solo 401k
- Roth 401k
Employers who offer Simple 401k plans may not be able to provide additional types of 401k plans.
The better you understand your organization's 401k plans and contribution limits, the better you can prepare for retirement. You also can make other types of retirement investments, including IRAs – which you can make with pre or post-tax dollars depending on the kind of IRA you purchase. The key is to invest in ways that limit your exposure to fines and penalties, save wisely, invest well in your 401k plans, and more.
Individuals can review the October 21, 2022 announcement issued by the IRS for additional information.