Last year, we reached the maximum limit for contributions to my 401(k). Hitting this ceiling in previous years has generally been a good indicator of a prosperous year for us. If we can achieve this, it’s a sign that we’re not weighed down by hefty expenses, such as medical bills.
Our financial strategy for 2023 involves prioritizing our 401(k) contributions again. Only after maxing out the company-sponsored 401(k) will we consider venturing into taxable investments.
You might wonder about the contribution thresholds for 2023 retirement accounts. Well, the Roth IRA has seen a slight bump this year, with the contribution ceiling now set at $6,500 and an additional $1,000 permitted for catch-up contributions.
Similarly, the 401(k) limit has jumped by $2,000. Since we aim to hit the ceiling again, I thought it’d be insightful to dive deep into the 401k contribution thresholds and norms for 2023.
The IRS unveiled their 401k guidelines recently. Great news – there’s a boost for 2023! You can now contribute a total of $22,500, marking an upswing of $2,000 from the prior year.
For 2023, individual 401(k) contributions have risen to $22,500 from the previous year’s $20,500. Additionally, the income brackets determining eligibility for traditional IRA deductions, Roth IRA contributions, and the Saver’s Credit have also been adjusted upwards.
The Genesis of the 401(k) Savings Plan
So, how did the 401(k) come into being, and why is it called that?
The 401(k) takes its name from the specific IRS code section that outlines its regulations. Intriguing, isn’t it?
Introduced in 1978, the 401(k) became popular in the 1980s as a more affordable alternative to the traditional employer-sponsored pension plans. This initiated a transition where employees started taking on more responsibility for their retirement savings.
Saving via a 401(k) requires understanding certain guidelines, including contribution ceilings, withdrawal rules, and conditions. Let’s delve in.
401(k) Contribution Limits for 2023
There’s an upper limit to how much you can put into your 401(k) annually. This year, that ceiling is $22,500. Below is a table showing the annual maximum limits since 2007:
| Year | 401k Limit |
|---|---|
| 2007–2008 | $15,500 |
| 2009–2011 | $16,500 |
| 2012 | $17,000 |
| 2013–2014 | $17,500 |
| 2015–2017 | $18,000 |
| 2018 | $18,500 |
| 2019–2021 | $19,500 |
| 2022 | $20,500 |
| 2023 | $22,500 |
From 2007 to now, we’ve witnessed a growth of $7,000 in the 401(k) limits.
Employer Contribution Guidelines for 2023
Employers can also chip in to your 401(k). If they offer, don’t hesitate – it’s essentially free cash!
Employers often match a fraction of your contributions, up to a certain income percentage. For instance, they might match 50% up to 6% of your salary. Some employers also set a cap, especially if you’re a high earner. High Compensated Employees (HCE), those earning over $150,000 in 2023, might encounter added restrictions. These rules are in place to promote participation from lower-paid employees, but they might limit HCEs from contributing beyond a particular income fraction.
Consult your plan administrator for specifics; the company’s limits might differ from federal ones.
401(k) Catch-Up Contributions for 2023
Those 50 or older by the end of 2023 can contribute extra, called a catch-up contribution, if their plan allows:
| Year | Catch-Up Limit |
|---|---|
| 2007–2008 | $5,000 |
| 2009–2014 | $5,500 |
| 2015–2022 | $6,500 |
| 2023 | $7,500 |
The catch-up contribution has seen a $1,000 hike to $7,500 this year.
Impact of Employer Contributions on Your Limit
A common query is whether employer contributions to a 401(k) impact individual limits. The answer is no. They are separate and don’t interfere with each other. This is beneficial as it enables you to stash away more if your employer contributes.
For example, someone with a $100,000 salary and an employer who matches 50% of the first 6% can contribute $22,500 themselves, and get an additional $3,000 from their employer, summing up to $25,500. If they qualify for catch-up contributions, the total can go up to $34,000.
Maximum Contribution for 2023
For 2023, considering individual contributions, employer matches, and other contributions, the uppermost limit for a 401(k) is $66,000 or 100% of the salary, whichever is less. This is a growth of $5,000 from the previous year.
I hope someday I’ll be in the bracket to utilize this full potential!
Do you have a 401(k)? Are you aiming to max it out next year?
