401k Contribution Limits And Rules

Last year we maxed out contributions to my 401(k).

We’ve been able to max out the 401(k) in the past, and when we do it always seems like a pretty good barometer of how good our year is going.

If we are able to max it out, it means we don’t have a ton of other expenses to worry about (like hospital bills).

In 2023 we plan on once again investing as much as we can in the company-sponsored 401(k), before investing in taxable investments.

So what do the contribution limits for retirement accounts look like in 2023?

The Roth IRA has gone up by a modest amount for 2023, with the IRA contribution limit going up to $6,500, and catch-up contributions at $1,000.

The 401(k) is a similar story. It has gone up by $2,000!

Today I thought I would take an in-depth look at what the 401k contribution limits, rules, and regulations will be for 2023 since we plan on maxing it out again this year.

The IRS released their 401k contribution guidelines this past week, and the max contribution has increased for 2023. That means you’ll be able to contribute $22,500, an increase of $2,000 from 2022.

The amount individuals can contribute to their 401(k) plans in 2023 will increase to $22,500 — up from $20,500 for 2022. The income ranges for determining eligibility to make deductible contributions to traditional IRAs, contribute to Roth IRAs, and claim the Saver’s Credit will also all increase for 2023.

401(k) – Origins Of The Tax Deferred Savings Plan

So where did the 401(k) originate, and where does it get it’s name?

The  401(k) gets it’s name from the subsection of the IRS code where the rules and regulations for the retirement account are laid out and provisioned. Exciting, right?

The 401(k) first became law in 1978, and was widely adopted in the 1980s as a cheaper alternative to traditional pension plans, which were usually paid for by employers.  It began a shift away from the responsibility of saving for retirement from the employer, to the employee.

When you are saving in a 401(k) there are a bunch of rules and regulations you’ll need to know about, including rules about how much you (and your employer) can contribute, when you can withdraw the money, and under what circumstances.  So let’s jump in and take a look.

Contribution Limits For The 401(k) In 2023

The 401(k) contribution limits are a set limit beyond which you can’t contribute to your account. It’s the maximum you can contribute under this tax-deferred plan, although you can also contribute to a Roth IRA, or to a taxable investment.

The contribution limit increases to $22,500 this year. The following table will show the maximum yearly contribution to the 401k account type every year since 2007.

Since 2007 we have seen an increase of $7,000 in the 401(k) contribution limits.

Employer Contribution Limits For 401(k) For 2023

Employers are able to contribute to an employee’s 401(k) plan as well. If your employer offers to contribute, take them up on that offer. It’s free money!

Employers often will contribute a percentage match, of your contribution up until a certain percentage of your income. For example, they may match 50% of your contributions, up to 6% of your salary.

Certain employers will also cap how much you can contribute to the company’s 401k plan. If you are a highly compensated employee (HCE), making above $150,000 in 2023, you might be subject to additional limits in your company’s 401(k). The rules get a bit complicated, and the rules are essentially there in order to encourage more 401(k) plan participation by less highly paid employees, but because of them often a company will not allow HCE to contribute more than a certain percentage of their income.

Just make sure to check with your 401(k) plan administrator to find out what your plan’s limitations are. They may be different from the government limits.

401(k) Catch-Up Contribution Limits For 2023

If you are at or over the age of 50 by the end of the 2023 tax year, and your plan allows it, you can make a catch-up contribution to your 401(k) plan.

The catch up contribution limits have gone up by $1,000 to $7,500.

Do Employer Contributions Affect Your Limit?

One source of some confusion for people is whether their employer’s contributions to their 401(k) will affect their own contribution limits. In other words, will their limit of $22,500 be affected by their employer’s contribution to their account.

In short, it won’t affect the employee’s limit.

The limits for employer and employee contributions are separate, and don’t affect each other. That’s good news because it means you can contribute more if your employer is making contributions for you!

Example: If someone makes $100,000 in pre-tax compensation, and their employer will contribute 50% of the first 6% , they could have $22,500 contributed by the employee, and $3,000 by the employer for a total of $25,500. If they’re over 50 they could also make catch-up contributions for a total of $34,000.

Maximum Contribution For 2023

One more thing to consider when looking at 401(k) plans for 2023.

The maximum contribution to a 401(k) plan when taking into account employee contributions, employer matching, and other contributions is $66,000 or 100% of their compensation, whichever is less.  That is a $5,000 increase from 2022.

Hopefully I’ll be in a position someday to be putting in and receiving that kind of a contribution!

Do you contribute to a 401(k)? Do you expect to reach the max contribution next year?