The steady increase in the cost of living and inflation across the U.S. has impacted virtually every aspect of the economy. Luckily, your 401(k) may see a much-welcomed benefit thanks to increased contribution limits going into effect this year.
In October 2022, the IRS announced it would raise the annual limit on the amount of personal contributions made to eligible retirement savings plans to $22,500 to better help Americans save and prepare for retirement. For those aged 50 and over, an additional catch-up contribution of $7,500 brings that total to $30,000.
Here’s what you need to know about the changes to best maximize your employer’s 401(k) benefit plan.
Beginning the plan year 2023, the personal contribution limit will increase from $20,500 to $22,500. The new limit applies to employees participating in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plans. For employees under 50 years of age, the total maximum contributions across all 401(k) plans can total up to $66,000 per year. This maximum value includes salary deferrals, Roth 401(k) contributions, employer contributions, and personal non-tax-deductible contributions.
For those over 50, an additional $7,500 in catch-up contributions is permitted, with the maximum total for contributions made across all retirement savings accounts (including catch-up values) being $73,500. It’s worth noting that catch-up contributions do not imply you are behind on your savings; therefore, any employee over the age of 50 is eligible to make these additional boosts to their savings.
401(k) Compensation Limits
The IRS also raised the amount of compensation eligible for 401(k) contributions to $330,000 (up from $305,000 in 2022). This means that if an employee earns over $330,000, their employer’s matching contribution will only apply to compensation up until this threshold.
In addition, the limit for those considered “highly compensated employees” is higher than in past years. Effective plan years beginning in 2023, highly compensated employees are those that own 5% or more of the company or receive over $150,000 in compensation from the business. Owners or those considered highly compensated are subject to a nondiscrimination test to ensure equal tax-saving advantages across the organization.
SIMPLE 401(k) Plans
For those contributing to SIMPLE 401(k) plans, the deferral limit increased from $14,000 to $15,500 for 2023. For those aged over 50, catch-up contributions were increased to $3,500 a year, up from $3,000.
Traditional IRA Plans
Contributions made to traditional IRA plans have increased to $6,500 for those aged under 50. The contribution catch-up limit of $1,000 for those over 50 years of age remains unchanged from prior years.
With the increase in contribution limits also came an increase in the phase-out ranges for deducting certain types of salary deferrals. Specifically, contributions to traditional and Roth IRA accounts will be affected and vary based on the taxpayer’s situation. It’s best to consult with your CPA to determine where your new contributions will fall in the phase-out range and decipher how to apply the best tax-saving strategies for your financial circumstances.
While these changes will have a minimal effect on the overall value of your retirement savings accounts, it’s still worth adjusting your contributions to ensure you’re making the most of your employer’s 401(k) plan.
If you have questions about how the new 401(k) contribution limits will affect you, ARB’s tax team can help. Contact us today.
Dalton Myers joined ARB as an intern in 2016 and became a manager in 2022. He specializes in providing tax services to auto dealerships, individuals, and private client service.