Last year, we fully utilized the contribution allowance for my 401(k).
Historically, we’ve always aimed to utilize the 401(k) to its fullest. When we manage this, it serves as a good indication of our financial health for the year.
Being able to utilize the maximum contribution often means we’re not burdened with unexpected and significant expenses, such as hospital bills.
For 2023, our strategy remains consistent. We aim to invest as much as possible in our company-sponsored 401(k), prior to considering taxable investments.
So, what do the 2023 contribution guidelines say for retirement accounts?
In 2023, the Roth IRA has seen a modest rise, setting the IRA contribution limit at $6,500, with an additional provision for catch-up contributions at $1,000.
As for the 401(k), it has witnessed an increase of $2,000 from last year.
I’ve decided to delve deep into the 401k contribution guidelines for 2023, especially since we’re hoping to utilize its full potential yet again this year.
The IRS made public their 401k contribution stipulations recently, marking the maximum contribution for 2023 at $22,500, which is a $2,000 increment from the previous year.
For clarity, the amount an individual can allocate to their 401(k) in 2023 has risen to $22,500, a bump from 2022’s $20,500. Simultaneously, the parameters for determining eligibility for contributions to traditional and Roth IRAs, as well as the Saver’s Credit, have been increased for the upcoming year.
The 401(k) – A Glimpse Into Its Inception
Ever wondered about the origins of the 401(k) and the story behind its name?
The term 401(k) is derived from a specific subsection of the IRS code, which details the provisions and guidelines for this retirement savings model. Fascinating, isn’t it?
The 401(k) was first introduced in 1978 and gained prominence in the 1980s. It emerged as a more cost-effective counterpart to the then prevalent employer-sponsored pension plans. This marked the beginning of a shift, transferring the onus of retirement savings from employers to employees.
Saving with a 401(k) involves adhering to various guidelines and regulations. Let’s understand this better.
Setting Aside Money in a 401(k) for 2023
The 401(k) contribution guidelines cap the amount you can deposit into your account. This cap is exclusive of what you might choose to deposit into a Roth IRA or a taxable investment fund.
This year, the cap is set at $22,500. Here’s a rundown of the highest possible annual contributions to a 401k since 2007:
| Year | 401k Contribution Cap |
|---|---|
| 2007 | $15,500 |
| 2008 | $15,500 |
| 2009 | $16,500 |
| 2010 | $16,500 |
| 2011 | $16,500 |
| 2012 | $17,000 |
| 2013 | $17,500 |
| 2014 | $17,500 |
| 2015 | $18,000 |
| 2016 | $18,000 |
| 2017 | $18,000 |
| 2018 | $18,500 |
| 2019 | $19,000 |
| 2020 | $19,500 |
| 2021 | $19,500 |
| 2022 | $20,500 |
| 2023 | $22,500 |
From 2007, there’s been a cumulative increase of $7,000 in the 401(k) contribution caps.
How Employers Contribute to the 401(k) in 2023
Employers have the option to contribute to their employee’s 401(k) plans. If you receive such an offer, it’s advisable to accept it. After all, it’s like receiving additional compensation!
Often, employers pledge a certain percentage of your contributions, capped at a fraction of your earnings. For instance, they might pledge a 50% match on your contributions, up to 6% of your total income.
However, there are restrictions, especially for high-earning employees. For those earning above $150,000 in 2023, the rules might limit the amount you can set aside in the company’s 401(k) scheme. These guidelines, albeit intricate, aim to promote more 401(k) participation among lower-wage workers. Consequently, some companies might limit the percentage high-earning employees can contribute. Always consult with your 401(k) plan administrator to clarify any uncertainties.
Catch-Up Contributions for 2023 for the 401(k)
If you’re 50 or older by the end of the 2023 tax year and your scheme permits, you can make additional contributions to your 401(k) account. Here’s a historical view:
| Year | 401k Additional Contribution Limit |
|---|---|
| 2007 | $5000 |
| 2008 | $5000 |
| 2009 | $5500 |
| 2010 | $5500 |
| 2011 | $5500 |
| 2012 | $5500 |
| 2013 | $5500 |
| 2014 | $5500 |
| 2015 | $6000 |
| 2016 | $6000 |
| 2017 | $6000 |
| 2018 | $6000 |
| 2019 | $6000 |
| 2020 | $6500 |
| 2021 | $6500 |
| 2022 | $6500 |
| 2023 | $7500 |
The limit has been raised by $1,000, allowing for a maximum contribution of $7,500.
Do Employer Deposits Impact Your Cap?
A common query is whether employer contributions influence individual caps. To put it succinctly, they don’t. The caps for both are distinct.
An example to illustrate: If an individual with a $100,000 pre-tax income has an employer willing to contribute 50% of the initial 6%, they can have a personal contribution of $22,500 and an employer contribution of $3,000, amounting to $25,500. If they are eligible for catch-up contributions, the total could go up to $34,000.
Overall Cap for 2023
Lastly, when reviewing 401(k) plans for 2023, remember that the aggregate contribution (including employee, employer, and other contributions) can’t exceed $66,000 or 100% of their income, whichever is lower. This represents a $5,000 increase from the previous year.
Hopefully, I’ll reach a stage where I can make and receive such substantial contributions!
What about you? Do you have a 401(k)? Are you aiming for the max contribution next year?
