IRS Raises 401(k) Contribution Limits by a Record Amount for 2023
We can all agree that inflation stinks, right? But here’s one handy side effect, and it’s good news if you’re trying to save money for retirement.
Because of runaway inflation, the IRS is ratcheting up 401(k) contribution limits faster than they ever have before. Next year, Americans will be allowed to funnel significantly more of our paychecks into 401(k) and similar retirement plans.
Yes, it’s true that only about 14% of us actually max out our 401(k) plans each year. But this is big news for those of us who do. Also, if you’re not maxing out your plan, you might want to start thinking about it.
What Are the New Limits for Retirement Accounts?
Here are the deets: In 2023, the maximum amount you’ll be able to contribute to a 401(k), 403(b) and most 457 plans during the year will rise to $22,500, the IRS announced.
That’s a noticeable jump up from $20,500 this year. In fact, it’s up by a record 9.8%. The IRS has never gone that big before.
Oh, and if you’ve got an individual retirement account, aka an IRA? Thanks to inflation, the limit on your annual contributions to your IRA will jump from $6,000 this year to $6,500 next year.
The catch-up contribution limit for 401(k) plans is rising from $6,500 to $7,500 a year, while the catch-up contribution limit for IRAs isn’t changing. Those 50 and older can save another $1,000 per year on top of their contribution limit.
You can make these catch-up contributions up until the filing deadline for that year’s taxes. So even after New Year’s 2022 has passed, you can still put money in your retirement accounts up until you file your taxes in April 2023.
So start socking that money away, if you can.
How Many of Us Are Maxing Out Our Retirement Plans?
Let’s get real, though. Most of us aren’t able to stash away that much money for retirement. It’d be nice, but we just can’t afford it.
How many Americans are maxing out their 401(k) contributions? For people with Vanguard accounts, it’s about 14%, according to a 2022 report about its investors.
Most people don’t make enough money to save the maximum. To do that next year, you’d have to put $1,875 per month into your 401(k) account if you’re under 50. Most of those who max out their plans earn more than $150,000 per year and tend to be closer to retirement age.
But those that do max out their plans reap the benefits: A whopping 825,000 Americans have become millionaires by maxing out their retirement plans.
What Should You Do About Your Retirement Accounts?
If you can’t save the maximum, most financial advisors recommend that you at least save enough to get the full employer match that’s being offered to you.
One of the best things about a 401(k) plan is that many employers will match your contribution up to a point. It’s part of your compensation package.
Say your employer offers to match 100% of your 401(k) contributions up to 6% of your income. If you make $50,000 per year and max out the employer match, you’d put in $3,000 and your employer would kick in another $3,000, doubling your savings.
If you’re not getting the full employer match, you’re basically passing up free money.
Experts also strongly recommend that you not dip into your retirement savings before you retire. You’ll pay heavy financial penalties, and you could put a serious dent in your retirement plans down the line.
Here’s a simple 401(k) guide for more information.
If you don’t have access to a 401(k) or 403(b) or 457 plan at work, we have ways to save for retirement on your own.
Later in life, you’ll be glad you did.
Mike Brassfield ([email protected]) is a senior writer at The Penny Hoarder.