Knowing the maximum 401(k) contribution for 2023 can save you from paying taxes twice. If you go beyond limits set by the IRS, you’ll pay income tax on the excess contributions now and again when you withdraw money from the retirement account. Learn how the contribution limits work and how much you can save in a 401(k) plan in 2023.
2023 401(k) Contribution Limits
Let’s take a look at the numbers surrounding the 2023 contribution limits and how they’ve changed year over year.
- The employee contribution limit for 2023 is $22,500, up from 20,500 in 2022.
- The 2023 total contribution limit is $66,000, a sizeable amount when combined with an employee 401(k) matching plan.
- The $7,500 catch-up contribution in 2023 rose by $1,000, up from $6,500 in 2022. This means if you’re 50 or older, you can contribute up to $30,000 in 2023.
The same contribution limits apply to 403(b) plans, Thrift Savings Plans and most 457 plans.
401(k) Income Limits for 2023
You can earn $305,000 in 2023 and take part in employer and employee contributions. Most 401(k) plans allow you to continue making contributions after you earn that amount, but the IRS stops your employer matches or other contributions.
Your 401(k) plan may also stop your elected deferrals once compensation reaches the annual limit, although this is not the norm.
|2023 401(k) Limits|
|Employee Contribution||Maximum total annual contributions.||$22,500|
|Total Contribution||Employee and employer contributions combined.||$66,000|
|Catch-up Deferrals||Additional amount for those over age 50.||$7,500|
|Income||Rules depend on the 401(k) plan.||$305,000|
401(k) Retirement Savings in 2023
Your 401(k) plan contributions are pretax amounts deducted from your paycheck, effectively reducing current income taxes while growing retirement savings. Contributions to your 401(k) are also called deferrals because you pay the income later (defer) when you retire. The Internal Revenue Service limits how much you can put into a 401(k) retirement plan each year starting January 1.
These retirement savings accounts are available through employers. You choose a percentage of your income from each paycheck to deposit in the 401(k) plan. Keep the annual total deferral within the 401(k) max contribution limits for 2023, and you won’t pay income taxes on that amount during the year. You pay taxes on plan distributions later, at your lower retirement income tax rate.
3 Limits for 401(k) Contributions
The IRS calculates how much you can contribute to a 401(k) using a cost-of-living adjustment (COLA) and the Consumer Price Index for All Urban Consumers (CPI-U). The figures include the third quarter CPI-U. Three types of contribution limits apply, whether you are active in one 401(k) plan or multiple plans.
If you have two jobs or change jobs in 2023 and contribute to both employers’ plans, be sure your total contributions stay within the annual limits.
Employee contribution limit: This is the maximum you can contribute to your 401(k) in 2023. If you have more than one 401(k), your total elected deferrals to all plans must not exceed this limit. One caveat is that your employer’s plan can impose a lower limit. Be sure to read your plan documents or ask your company’s plan representative to confirm the maximum contribution.
Total contribution limit: Some employers match a percentage of the amount you deposit in a 401(k). An employer may also make nonelective contributions to a 401(k) even if you do not contribute to the plan. The total contribution is equal to the sum of:
- Your total annual 401(k) contributions (elected deferral)
- Employer match or nonelective contribution (including SIMPLE IRAs)
- Any contributions you make to a Roth 401(k)
Forfeitures are employer contributions that accumulate if you leave a 401(k) plan before working long enough to be fully vested (i.e., own all employer contributions).
Total contributions can’t exceed your annual income, even if the limit is set above the amount you earn. You can exclude catch-up contributions from the total contribution limit after you turn 50.
Catch-up limit: If you are age 50 or older by the end of the calendar year, you may contribute more to your 401(k) each year. You can boost your 401(k) by thousands of dollars when you add the catch-up limit to employee and employer total contribution limits.
If You Go Over the 401(k) Max Contribution Limits
A change in income or contributing to more than one plan can create an excess deferral. Going over the max 401(k) contribution limits happens when contributions total more than the amount allowed for 2023.
- If you go over the maximum 401(k) limits, notify your plan administrator before April 15 of the year after the overcontribution is made. Ask for a distribution from the plan of the excess deferral adjusted for earnings.
- The distribution is included in your 2023 gross income for tax purposes. File an amended tax return if you file your taxes before requesting the distribution.
- While the earnings are taxed, you won’t owe the additional 10% tax on early distributions. You will receive Form 1099-R from the plan for tax reporting.
If you leave the excess funds in the plan, the amount is excluded from your cost basis when you take 401(k) distributions after retirement. You get taxed on the excess deferral left in the 401(k) when you contribute and again when you take a distribution. Speak to a financial advisor if you don’t fully understand how to avoid creating an excess deferral.
It’s tough to live comfortably on Social Security benefits alone. If your employer offers a 401(k) plan, take advantage of the tax benefits combined with future retirement income. Start with a small contribution if you’re on a tight budget. Know the annual limits on elected deferrals, and plan early to maximize your 401(k) savings in 2023.