Retirement planning

Limits on 401(k) contributions for 2022 and 2023

The 401(k) plan is a terrific approach to achieve your long-term objective of having a comfortable retirement. However, the contribution caps are the same whether you select a standard or Roth 401(k).

According to Katie Brewer, CFP, founder of Your Richest Life, a financial planning company specializing in Gen X and Gen Y, “it’s much easier to start saving for retirement now so that the retirement accounts have time to grow rather than waiting to save for retirement, where you would need to save much more than if you had started a decade before.”

Employees have the option to pay themselves first with a 401(k) plan by making sizeable annual contributions toward retirement. Simply choose investments and set up a payroll deduction to contribute to your 401(k) at first. Then, perhaps once a year, update your preferences. A 401(k) allows you to save much more money than an IRA does.

Limits on 401(k) contributions for 2022 and 2023

The 401(k) ceiling for employee salary deferrals for 2023 is $22,500, which is more than the $20,500 cap for 2022. Employer matching, which can be fairly significant, don’t count toward this cap.

The total contribution cap, which accounts for both employee and employer contributions as well as after-tax contributions, if your employer offers those, has increased to $66,000 in 2023 from $61,000 in 2022.

Workers 50 and older can add up to $7,500 more annually as a catch-up contribution on top of these amounts starting in 2023, up from $6,500 in 2022.

Other so-called “defined contribution plans,” such as the following, are also subject to the 401(k) contribution limits:

  • Workers in the nonprofit and education sectors may enroll in 403(b) plans.
  • Employees of state and local governments use the majority of 457 plans.
  • The Thrift Savings Plan of the federal government.
401(k) plan limits20222023Change
Maximum salary deferral for workers$20,500$22,500+$2,000
Catch-up contributions for workers 50 and older$6,500$7,500+$1,000
Total contribution limit$61,000$66,000+$5,000
Total contribution limit, plus catch-up contribution$67,500$73,500+$6,000
Compensation limit for figuring contributions$305,000$330,000+$25,000
Compensation threshold for key employee nondiscrimination testing$200,000$215,000+$15,000
Threshold for highly compensated employee nondiscrimination testing$135,000$150,000+$15,000

Match by employer

If you don’t take advantage of the matching contribution your employer frequently offers, you’re turning down free money. However, you might not have quick access to that money.

While your contributions are usually immediately vested in the plan, which means they are added to your account, employers may place time limits on their contributions to encourage employees to stay with the company.

According to Brewer, “a business match is a way whereby your firm will contribute to your retirement savings on your behalf, but only if you save the required minimum to qualify for the match.” “It’s free money, but to obtain the free money you have to put a specific amount into retirement.”

A typical 401(k) plan may offer an employer match of 50 cents for every dollar contributed by employees, up to a maximum of 6 percent of their salaries, or 3 percent of their pay. Employees would need to contribute 6% of their pay to their 401(k) plan in order to benefit from the full match. Some plans are more giving, providing a total match of 6% or more. The employer match is free money for you and a guaranteed return on your investment, so be sure to take advantage of it.

A larger contribution ceiling applies to employers.

The maximum 401(k) contribution cap set by the employer is substantially more lenient. The most that you and your employer can collectively contribute to your 401(k) plan is $66,000 in 2023, up from $61,000 in 2022. (Again, individuals 50 and older may additionally contribute a $7,500 catch-up contribution in 2023.) This means that, although it is uncommon, an employer could theoretically make a considerably larger contribution to your plan than you do.

For all tax-qualified plans, the salary ceiling for calculating employer and employee contributions is $330,000. Even at that level, a sizable employer contribution would be required to achieve the $66,000 ceiling.

Roth 401(k) versus traditional (k)

Some employers provide both a Roth 401(k) and a regular 401(k) (k). You can postpone paying income tax on the amount you put to a standard 401(k) plan. In other words, if you make $80,000 per year and contribute the maximum $22,500, your taxable income for the 2022 tax year would be $57,500 (assuming no additional deductions).

You won’t receive an upfront tax break with a Roth 401(k) plan, but you won’t have to pay taxes on the money when you withdraw it in retirement. Your entire cumulative income and contributions are tax-free.

You can benefit from tax diversification throughout retirement by investing in both kinds of plans.

If your employer offers both a Roth and a regular 401(k), you are allowed to make contributions to either one as long as your combined employee contributions to both don’t exceed $22,500.

Some employers additionally provide a “after-tax plan,” which enables you to save up to the entire annual limit of $66,000, in addition to the Roth and conventional 401(k). You can use this account to save money after taxes, which will grow tax-deferred in your 401(k) account until withdrawal, at which point any earnings are removed will be subject to tax.

Can I fund my 401(k) with 100% of my salary?

The most you can give if your income is less than $22,500 is what you make. A 401(k) plan document, which governs each specific plan and might set a contribution cap, should also be mentioned. This is especially true for highly compensated workers, who in 2023 are those who make at least $150,000 or who own more than 5% of the company.

To ensure that highly rewarded employees don’t receive a skewed advantage relative to the rank and file, sponsors of major corporate plans are required to adhere to certain discriminatory testing regulations. Even though they probably can afford to save more, highly compensated employees generally cannot contribute more than 2 percentage points of their compensation more than employees who make less on average. Instead of giving preference to one group over another, the objective is to motivate everyone to implement the plan.

For businesses that want to get past the prohibition on discriminatory testing, there is a workaround. Regardless of the level of employee contributions, they can either offer everyone 3 percent of pay or a 4 percent matching contribution.

What portion of my income should I put toward a 401(k)?

Brewer proposes that, depending on your age, your payments should be based on a portion of your salary. If you’re in your 20s or 30s or if you started saving during those years, she advises that you set aside between 10 and 15 percent of your gross income. Brewer advises setting aside between 15% and 25% of your income if you’re in your 40s or 50s and fall behind on your retirement plans.

Start with at least 3 percent to get starting, advises Brewer, if you aren’t currently saving anything for retirement. “Increase your contribution by at least 2 percent each year until you reach your target savings percentage. Do a bigger increase in years if you obtain a major raise.”

Advantages for senior investors

A total payment of $30,000 may be made in 2023 if you are at least 50 years old and are eligible to make “catch-up” contributions by adding an extra $7,500. Your 401(k) plan’s overall limit, including employer contributions and forfeited allocations, is $73,500 in 2023, which is $7,500 more than the $66,000 cap for everyone else. Forfeitures are paid out of an account where corporate payments from departing workers who weren’t vested in the plan grow.

How to make use of your retirement funds

Usually, accessing your money might be challenging, and the rules are frequently set by the plan’s design rather than by laws.

Regulations, for instance, permit you to do the following without incurring a bonus penalty:

  • Obtaining a loan.
  • Receiving a hardship withdrawal prior to turning 59 12.
  • 59 12 years of age.
  • Quitting your job the year you turn 55 or later.

While the majority of plans do include loan provisions, many also prohibit hardship withdrawals, and some even require members who are 59 12 years old or older to be terminated before they can use their funds.

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was passed in response to COVID-19 and made it simpler to access your money. If the plan permitted it, you may now borrow or receive up to $100,000 in dividends. These withdrawals needed to be made before 2020 came to a conclusion. If you took out a hardship loan in 2020, you would be able to defer repayment of the loan for three years tax-free and avoid incurring a 10 percent penalty on the amount borrowed.

Brewer cautions avoiding accepting a payout or a loan until you’re genuinely stuck. She emphasizes that time cannot be replaced in the market and that persistent saving through time is one of the finest methods to accumulate wealth for the future.

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