What Is the 401(k) Contribution Limit for 2022 & 2023?

What Is the 401(k) Contribution Limit for 2022?

A 401(k) account is a retirement account that is funded with pre-tax dollars.

A key feature of this type of account is that how much you can contribute per year varies based on several factors, including whether you are eligible for an employer match.

For 2023, the contribution limit is set at $22,500 with a catch-up contribution of $7,500 for those who are 50 or older.

Is It Good to Max Out 401(k) Contributions?

If you have the means to contribute the full $22,500 into your 401(k) account in 2023, this would be an excellent option.

Not only will you defer paying taxes until retirement when you withdraw the funds, but your investment gains can grow tax-free as well.

However, experts say that before you jump into maxing out your 401(k) contributions, you should consider filling other needs first, such as saving for a down payment on a house or an emergency fund.

Of course, if your employer does not offer matching funds or if you do not have the means to contribute that amount each year, it makes sense to invest at least enough to qualify for any match provided by your company.

How Does 401(k) Employer Matching Work?

Some employers will match your contributions to a 401(k) account up to a certain percentage of pay.

The amount will depend on the employer and it may be expressed as either a certain percentage of your salary, a dollar amount, or a percentage of the contribution you make.

Because employer matching is essentially free money, it is best to take advantage of it if your employer offers it.

Contribution Limit for Employer Matching

There are limits set by the IRS for matching contributions made by the employer to an employee's 401(k) account.

In 2023, the total limit of the combined contribution from employer and employee is $66,000 or 100% of the employee's salary – whichever is lower.

Is the Employer Match Amount Included in the 401(k) Limit?

No, the employer match is a separate contribution from your own. While it may be added to an existing retirement account, it is not included in the retirement account limits published by the IRS.

Contribution Limit for Highly Compensated Employees (HCEs)

The IRS defines highly compensated employees (HCEs) as follows:

• The employee has earned $150,000 or more over the previous year, OR
• Regardless of compensation, the employee owns more than 5% of the interest in the business at any point during the current or preceding year
  
  

The IRS does not set an explicit limit regarding the contributions to be made by HCE to their 401(k) accounts.

However, companies need to be careful that contributions made by HCEs do not exceed the limits set for other employees.

Companies need to undergo a testing process to determine if their 401(k) contributions are being made in a fair and non-discriminatory way.

The Bottom Line

401(k) accounts are a great way to save for retirement and there are a lot of options available regarding who can contribute, how much they can contribute, and the matching amounts from employers.

One of the most notable benefits of a 401(k) account is the matching contributions made by the employer.

Thus, it is to the employee's benefit to take advantage of these matches whenever possible.

Another major benefit of 401(k)s is that their contributions are pre-tax, meaning this money is deducted before federal income tax is factored in.

This means when you start taking money out when you retire, you will not pay as much in taxes and will save more in the long run.

When deciding how much to contribute, you need to think about whether or not your employer offers a match, and if so, how much.

In addition, you should take into consideration any other future needs you have, such as an emergency fund or saving for a down payment on a house.

401(k)s are only one form of retirement account that you should put money in when possible, but it is important to take into account all of your options.

When in doubt, a financial advisor can be a great resource for figuring out what is best for your long term finances.

FAQs

1. Why are there contribution limits set for retirement savings accounts like 401(k)?

The purpose of placing limits on contributions and benefits is to help ensure that these plans are used for retirement savings, not as another form of tax-favored saving for current consumption. It also maintains that the limit increases over time with inflation.

2. Is the employer matching contributions mandatory for 401(k) accounts?

The employer match is not mandatory, but it can be a great way to supplement your retirement savings.

3. What is the use of catch-up contributions?

Catch-up contributions are additional amounts that can be contributed to retirement accounts for employees who are 50 or older. The purpose is to allow older workers with fewer years until retirement to make larger contributions into their plans.

4. Do contribution limits change every year?

Yes, they usually change every year, as set by the government.

5. What is the IRS' basis for contribution limits?

The IRS uses the Department of Labor's consumer price index for urban workers to adjust the limits every year. This is done because it represents an adjustment that maintains purchasing power in terms of savings plans and benefits over time.