A 401(k) is a retirement account offered by employers that also offers tax benefits. Both employees and employers can make contributions up to the 401(k) contribution limits.
How are 401(k) contribution limits determined? Toward the end of each year, the Internal Revenue Service decides on the limits for the following year. Here are the 401k contribution limits for 2023.
What Is The New Law for 401(k)s in 2023?
The 401(k) contribution limits in 2023 have increased for employees to $22,500. The 2022 limit was $20,500. Employees age 50 and over can make an additional, catch-up contribution of $7,500, making their total contribution limit $30,000 for 2023.
|Contribution||2022 Amount||2023 Amount||Amount Difference|
|Maximum Employee Contribution||$20,500||$22,500||+$2,000|
|Additional Employee Catch-Up Contribution if Age 50 or Older||$6,500||$7,500||+$1,000|
|Maximum Employee Contribution ifAge 50 or Older||$27,000||$30,000||+$3,000|
Unlike with an individual retirement account, you can only make 401(k) contributions for the current calendar year. For example, you can’t make a 401(k) contribution for 2022 in 2023.
Your employer is allowed to match your 401(k) contribution. The 401(k) contribution limits in 2023 for an employer match have also increased, increasing the total maximum contribution. So, what is the retirement max contribution for 2023?
The total combined 401(k) contributions limit of both you and your employer is $66,000.
The maximum percentage contribution to a 401(k) is 100% of your compensation. Your limit is either 100% of your compensation or $66,000, whichever is lower.
The maximum employer 401(k) contribution for 2022, along with employee contributions, was $61,000.
The catch-up contribution also applies to the overall limit, which is $73,500 in 2023.
|Contribution Limit||2022 Amount||2023 Amount||Amount Difference|
|Maximum Limit With Catch-Up Contributions||$67,500||$73,500||+$6,000|
401(k) Contribution Limits on Highly Compensated Employees
With the 401(k) tax advantages, there is the potential for employees who make more to benefit more from deferring taxes. To ensure everyone is treated fairly — and the IRS gets its fair share of taxes — the IRS put rules into place to limit how much highly compensated employees can contribute.
The IRS defines highly compensated employees as:
- Individuals who owned more than 5% of the business at any time during the previous year
- Individuals who made more than $135,000 in 2022 or $150,000 in 2023
- Individuals who were in the top 20% of employees when ranked by compensation (this measurement is optional for employers)
If a highly compensated employee has exceeded the contribution limits, the employer can either refund the excess contributions or pay a 10% excise tax. Employers have 2.5 months to complete either option.
Exceeding 401(k) Contribution Limits
Going over 401(k) contribution limits isn’t the end of the world, but it can cause a few headaches. Notify your employer immediately if you’ve exceeded the limits. You will need to withdraw your excess contributions.
- If you withdraw the excess by April 15 of the following year, it is not reported again as part of your income.
- If you withdraw the excess after April 15 of the following year, it is reported again as part of your income, which means you get taxed twice.
Even with the 401(k) contribution limits, company contributions help boost your retirement savings, and they lower your taxable income.
The bottom line? Always be on the lookout for any opportunity to grow your wealth. You have control over these many moving pieces, so be sure to keep these in mind when creating the foundation for your future.
Melinda Sineriz contributed to the reporting for this article.
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