401(k) Contribution Limits 2023

In 2023, the 401(k) contribution limit was set to $22,500 for employees, or $30,000 for employees age 50 or older. This is higher than the 2022 limit, which was $20,500 for individuals and $27,500 for those 50 and older.

The limit on annual contributions to an IRA increased to $6,500, up from $6,000. The IRA catch‑up contribution limit for individuals aged 50 and over is not subject to an annual cost‑of‑living adjustment and remains $1,000.

401k Catch-up Contribution Limits 2023

For 2023, employees aged 50 and above have the advantage of an increased catch-up contribution limit.

If you’re contributing to a 401(k), 403(b), most 457 plans, or the federal government’s Thrift Savings Plan, the limit has risen to $7,500—up from the previous $6,500.

This adjustment means eligible participants can now invest up to $30,000 for their retirement. Additionally, those in SIMPLE plans see a boost as well, with catch-up contributions going up to $3,500 from the former $3,000 limit.

FAQ

What Happens If You Contribute Too Much to Your 401(k)?

If you contribute too much to your 401(k), you could face the following consequences:

• Excess contributions tax: You will owe a 6% tax on the excess contributions, plus any earnings on those contributions. This tax is applied each year until the excess contributions are corrected.
• Early withdrawal penalty: If you withdraw the excess contributions before age 59½, you may also owe a 10% early withdrawal penalty.
• Double taxation: If you do not withdraw the excess contributions until after age 59½, you will have paid taxes on them twice. This is because you will pay taxes on the excess contributions when you withdraw them, even though you already paid taxes on them when you contributed them.

To avoid these consequences, you should correct any excess contributions as soon as possible. You can withdraw the excess contributions from your 401(k) plan. You can also roll over the excess contributions to another qualified retirement plan, such as an IRA.

To correct excess contributions, you will need to contact your plan administrator. They will be able to help you withdraw the excess contributions and roll them over to another account, if desired.

What Is a Good Percentage to Contribute to a 401(k)?

A good percentage to contribute to a 401(k) is 10-15% of your annual salary. This is a general guideline, and the best percentage for you will depend on your individual financial situation and retirement goals.

If you are just starting out, you may want to start with a lower contribution rate, such as 5% or 7%. Once you have established a financial cushion and paid off any high-interest debt, you can gradually increase your contribution rate.

If you are nearing retirement, you may want to contribute more than 15% of your salary to catch up on any savings you may have missed.

Here are some tips for increasing your 401(k) contribution rate:

• Set up automatic increases in your contribution rate. This way, you will gradually increase your savings without even having to think about it.
• Take advantage of any employer-matching contributions. If your employer offers to match your 401(k) contributions, be sure to contribute enough to get the full match. This is essentially free money!
• Consider making catch-up contributions if you are age 50 or over. Catch-up contributions allow you to contribute more than the annual contribution limit to your 401(k).

If you have any questions about how much to contribute to your 401(k), you should speak with a financial advisor. They can help you assess your individual financial situation and create a retirement savings plan that meets your needs.

Here is a table of recommended 401(k) contribution rates based on age:

Of course, these are just recommendations. You may need to adjust your contribution rate depending on your individual circumstances.

How to Maximize Your 401(k) Contributions

• Take advantage of employer matching. If your employer offers to match your 401(k) contributions, contribute enough to get the full match. This is essentially free money!
• Increase your contribution rate gradually. If you can’t afford to contribute the maximum amount to your 401(k) right away, start with a smaller amount and increase it gradually over time. Even a small increase can make a big difference over time.
• Make catch-up contributions if you’re eligible. If you’re age 50 or over, you can make catch-up contributions to your 401(k). This allows you to contribute more than the annual contribution limit to catch up on any savings you may have missed.
• Rebalance your portfolio regularly. As you get older, you may need to rebalance your 401(k) portfolio to become more conservative. This means investing more in bonds and less in stocks. Rebalancing can help you reduce your risk of loss as you approach retirement.
• Automate your contributions. Set up automatic contributions from your paycheck to your 401(k). This way, you’ll save money without even having to think about it.
• Consider investing in low-cost index funds. Index funds are a good way to invest in the stock market without having to pick individual stocks. They also tend to have lower fees than actively managed funds.
• Don’t panic sell when the market goes down. It’s normal for the stock market to go up and down. If you sell your investments when the market is down, you’ll lock in your losses. Instead, stay invested and ride out the volatility.