Inflation has been on a tear this past year. The good news is that in 2023 you will be able to put more money away in your 401(k) and IRAs. The IRS released the contribution and tax-deferral limits for 401(k) plans, IRAs, and other retirement accounts for 2023. Changes are based on the U.S. cost of living increases, and there are some notable changes for those saving in 401(k) accounts.
401(k) employee contribution limits increase in 2023 to $22,500 from $20,500 in 2022. In addition, those over 50 years of age can make additional catch-up contributions of $7,500 per year (that's up to $30,000 per year in total excluding any employer match) to their 401(k) accounts. Most 401(k)s allow Roth 401(k) contributions. Employees may choose to put some, none, or all contributions into the Roth 401(k) or tax-deferred option. Do know that all employer match or contribution must be provided on tax deferred basis. Separately, IRA limits increased $500 to $6,500; however, IRA catch-up limits remain unchanged.
The Total Amount You Can Defer Into a 401(k) is Increased to $66,000
Another 401(k) area of import that changed is the amount you can contribute and receive in total to your 401(k) account. If you receive company matching contributions or profit sharing, the all-in tax-deferral limit has been increased from $61,000 to $66,000 for 2023 with those over 50 years able to put in $73,500 with the catch-up. Here is a summary of the 2023 401(k) limits as compared to 2022:
|401(k) Limits for 2023|
|Employee contribution limit||$22,500||$20,500|
|Annual limit per individual||$66,000||$61,000|
|Age 50+ catch-up amount||$7,500||$6,500|
|Annual compensation limit||$330,000||$305,000|
|Highly compensated employees||$150,000||$135,000|
401(k) Saving Advantages Over Traditional IRAs Are Significant
The tax advantages for 401(k) savers versus those opting to use IRAs or don't have access to a 401(k) plan is large and is now even a bit bigger.
|401(k) Advantages Over Traditional IRAs in 2023|
|Annual limit per individual||$66,000
(employee + employer contributions)
|Age 50+ catch-up amount||$7,500||$1,000|
|Roth income limit||None||$153K*|
|Penalty-free access, if needed||Yes, via a loan||No|
*Beginning at $138K, the amount you are allowed to contribute begins to decrease, hitting $0 at $153K for singles (range is $218K to $228K for married couples filing joinly)
Along with 2023 IRA contribution limit increase, you can earn more in 2023 and are able to deduct your IRA contributions. The phase out income limits for contributing to a Roth IRA are up $9K to $14K from the 2022 phase out ranges depending on your filing status.
Refer to IRS announcement and notice for 2023 for more details.