Key points:
- The 401(k) contribution limit for 2023 is $22,500.
- If you’re 50 or older, you’re allowed a catch-up contribution of $7,500 annually.
- You can contribute to more than one 401(k) plan.
The employer-sponsored 401(k) plan is one of the best ways to save for retirement, thanks to the short- and long-term tax advantages, the high contribution limits, and the potential for an employer match.
As an employee, you can contribute up to a certain amount of your salary each year. Traditional 401(k) contributions are pretax, reducing your taxable income. They also grow tax-deferred until you withdraw the money during retirement.
Even better, many companies that offer a 401(k) plan also offer a matching contribution, meaning if you contribute to your 401(k) plan, your employer will match it, usually up to a percentage of your salary.
But the IRS also limits the amount you can contribute to your 401(k) plan each year. So if you’re planning to save for retirement with this type of account, it’s important to understand how much you can contribute and some other ways to save for retirement in addition to your 401(k).
401(k) contribution limits for 2023
In 2023, the IRS allows you to contribute up to $22,500 to your 401(k) plan, up from $20,500 in 2022.
The IRS revisits these numbers annually and, if necessary, adjusts them for inflation. Given the high inflation numbers throughout 2022, the IRS increased the limits by more than in recent years.
The IRS also allows you to invest a larger amount in your 401(k) if you’re 50 or older to account for having less time to save for retirement.
That extra contribution is called a catch-up contribution, allowing you to contribute an additional $7,500 per year to your 401(k) plan. As a result, the total allowable contribution for someone 50 or older is $30,000 in 2023.
Remember, this limit applies to pretax and after-tax 401(k) contributions. Pretax contributions are taken from your paycheck before taxes are applied. After-tax contributions — Roth contributions — are contributed after the money has been taxed so you can withdraw it tax-free during retirement.
The table below gives a more thorough breakdown.
Employer contributions
Many employers contribute to their employees’ 401(k) plans, usually in the form of matching contributions. In other words, an employer may match your contributions up to a particular percentage of your income.
Furthermore, if your employer contributes to your 401(k) plan, its contributions don’t count toward your annual contribution limit. Instead, the IRS sets a separate combined contribution limit for employee and employer contributions. That limit for 2023 is $66,000 or 100% of your salary, whichever is lower. That amount is $73,500 if you qualify for catch-up contributions.
The table below compares the various contribution limits for 2023 to those from 2022:
Can you contribute to more than one 401(k) plan?
In some cases, you may have the opportunity to contribute to more than one employer-sponsored retirement plan in a year. It could be that you switch employers throughout the year, that you have more than one job that offers a retirement plan or that your employer offers more than one type of plan.
The good news is that nothing prevents you from contributing to multiple 401(k) plans. The not-so-good news is that your allowable contributions don’t change. You can contribute up to $22,500 total to your retirement accounts.
Here’s an example from Robert Massa, the managing director of retirement in Houston for Qualified Plan Advisors:
Example: If you work for Company A from Jan. 1 to June 30, 2023, and contribute $15,000 to Company A’s 401(k), you can contribute only $7,500 (or $15,000 for those age 50 or older) for the rest of the year in another employer’s 401(k).
The new $22,500 limit for 2023 applies not only to 401(k) plans but also to 403(b) plans, most 457 plans and certain other plans.
Maxing out your 401(k)
Even if retirement feels like a long way off, it’s best to start saving as early and as much as possible to ensure a comfortable retirement. If you’re pursuing early retirement, prioritizing retirement savings in your budget is all the more important.
While any amount you can contribute to your 401(k) plan is better than nothing, some workers max out their accounts to set themselves up for the best financial situation in their older years. Maxing out your retirement account simply means contributing up to $22,500 annually.
Here are three tips to contribute the most to your 401(k):
1. Contribute early
If you can afford to, it might make sense to contribute as much as possible to your 401(k) plan earlier in the year. While dollar-cost averaging (meaning investing a set amount regularly) is a common retirement investing method, some data suggest that lump-sum investing is more successful.
2. Take advantage of 401(k) matching
Many employers offer a 401(k) match up to a percentage of your annual income. Even if you choose not to max out your 401(k) contribution, investing at least enough to get your full employer match is worth doing. Not only is it essentially a 100% return on your investment, but it’s a part of your compensation package that you’d otherwise be passing up.
3. Work toward saving 20%
It may not be feasible for everyone to invest $22,500 in their 401(k) plan each year. It’s OK to start small, even with just a percentage or two of your income. Make it your ultimate goal to allocate 20% of your income toward your investments.
Are you wondering what it would look like to max out your 401(k) contributions for the year? The table below breaks it down for different paycheck schedules:
4 ways to save for retirement
A 401(k) plan is a great way to save for retirement. Still, it’s far from your only option.
You might decide to use one of these alternatives either in addition to or instead of a 401(k) plan. Or if you’ve maxed out your account, your employer doesn’t provide a 401(k) plan or doesn’t offer a match, or you don’t like the investment options or fees in your 401(k) plan, you can use these options in lieu of a 401(k):
1. Traditional IRA
An individual retirement account (IRA) is a type of retirement plan that you manage on your own rather than being offered one through an employer. The IRS allows you to contribute up to $6,500 annually (or $7,500 for those aged 50 or older).
Contributions to a traditional IRA are often tax-deductible, just like a traditional 401(k). However, you may be unable to take a deduction. For example, you won’t qualify for the deductible if you have a retirement plan through your employer and you’re filing as head of household with a taxable income that exceeds $83,000.
2. Roth IRA
A Roth IRA is similar to a traditional IRA but has a different tax advantage. Rather than receiving a tax benefit on the front end, you’ll receive it at retirement.
Like a traditional IRA, a Roth IRA allows you to contribute up to $6,500 annually (or $7,500 for those aged 50 and older). However, you can only contribute the full amount to a Roth IRA if you earn less than $138,000 as a single filer. You can contribute a reduced amount with income from $138,000 to $153,000. If your income is $153,000 or higher, you can’t contribute to a Roth IRA.
3. Spousal IRA
If you aren’t currently employed, you probably don’t have access to a 401(k) plan. You aren’t eligible to contribute to a traditional or Roth IRA because you must have earned income that year. But if your spouse has earned income, you can contribute to a spousal IRA (just remember you must file your taxes as married filing jointly).
A spousal IRA has the same rules as a traditional or Roth IRA. Instead of contributing based on your own earned income, you’re contributing based on your spouse’s.
4. Health savings account
While a health savings account (HSA) isn’t technically a retirement account, it comes with serious tax advantages — especially for retirees — that make it well suited to retirement savings.
Not everyone can open an HSA, though. You’re eligible to contribute to an HSA only if you have a high-deductible health plan, which is a plan with a deductible of $1,500 or higher for individual coverage and $3,000 for family coverage.
In 2023, you can contribute up to $3,850 per year to an HSA for an individual. If you have a family plan, you can contribute up to $7,750.
What happens if you contribute too much to your 401(k)?
If you aren’t careful, you could contribute more than the IRS limit to your 401(k) plan. Excess deferrals are included in your taxable income for the year if that happens.
Additionally, they’ll be taxed again when you withdraw them from the plan during retirement. In other words, you’ll end up paying taxes on those contributions twice.
The good news is you can fix your mistake before your excess contributions are taxed. To do so, you’d have to make a corrective distribution, meaning you’d pull the excess money from the account (as well as any money earned on those excess deferrals). This corrective distribution must be made by tax day, typically April 15.
Frequently asked questions (FAQs)
There’s no hard-and-fast rule for how much you should contribute to your 401(k) plan. At the very least, contribute enough to earn your full matching contribution from your employer. Many financial experts recommend contributing at least 10% to 15% of your income.
The IRS changes 401(k) contribution limits to account for inflation. After years of high inflation, such as in 2022, the IRS might increase the limits by thousands of dollars. But there have also been years when the IRS didn’t increase the limits. For example, the limit was $19,500 for both 2020 and 2021.
For the tax year 2023, the IRS raised the contribution limits to $22,500, up from $20,500 for 2022. The IRS also increased the catch-up contribution for workers 50 and older. So if you’re eligible for a catch-up contribution, you can contribute $3,000 more in 2023 compared to 2022.