401k contribution limits 2023

401k contribution limits for 2023 are $22,500 per person, up from 20,500 in 2022. All 401k participants over the age of 50 can make a catch-up contribution of $7,500, for a total of $30,000

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What is 401k?

401k is a workplace retirement plan where employees and employers can make retirement contributions. These retirement plans can be one of the easiest and most effective ways to save for retirement. As an employee, you can automatically contribute your 401k directly through your company payroll. You can choose the percentage of your salary toward your retirement savings. Most 401k plans will provide you with multiple investment options in stocks and fixed income. Additionally, most companies offer a 401k match up to a certain percentage. In most cases, you must participate to receive your employer match.

There are three types of 401k contributions – traditional 401k tax-deferred, tax-exempt Roth 401k, and After-tax contributions.

You can select to make both types of tax-deferred and Roth contributions simultaneously. However,  the combined annual contribution amount cannot exceed your annual limit.

Tax-deferred 401k

Most employees commonly choose to make tax-deferred 401k contributions. These payments are tax-deductible. They will lower your tax bill for the current tax year. Your investments will grow on a tax-deferred basis. Therefore, you will only owe federal and state taxes when you start withdrawing your savings.

Roth 401k

Roth 401k contributions are pretax. You will pay all federal and state taxes before making your contributions. The advantage of Roth 401k is that your retirement savings will grow tax-free. If you keep your money until retirement, you will withdraw your gain tax-free. It’s a great alternative for young professionals and workers in a low tax bracket.

After-Tax 401k Contributions

Some 401k plans will allow you to make after-tax contributions. You can make these contributions if you have maximized your annual limit. Generally, after-tax contributions are made after you pay taxes on your income. Only your future gains will be taxable as ordinary income. Due to these tax complexities, after-tax contributions are more common as part of a Mega Backdoor Roth conversion.

Mega Backdoor Roth conversion

Mega back door conversion is a two-step process that allows you to make after-tax contributions to your 401k plan and immediately transfer the money to your Roth 401k account through in-service conversion.

What are my 401k contribution limits for 2023?

401k contribution limits change every year. IRS typically increases the maximum annual limit with the cost of living adjustment and inflation. These contribution limits apply to all employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan. Additionally, the limits apply to both tax-deferred and Roth contributions combined. 

  • Employees can contribute up to $22,500 to their 401(k) plan for 2023, a $2,000 increase from 2022.
  • Employees of age 50 or over are eligible for an additional catch-up contribution of $7,500 in 2023, a $1,000 increase from  2022
  • If an employee makes the maximum allowed contribution, the company match cannot exceed  43,,500, up from 40.500 in 2022
  • The maximum 401k contribution limit for 2023, including employee contributions and employer match, is $66,000, up from 61,000 in 2022
  • The total 401k contribution limit for 2023  from all sources, including catch-up contributions, is $73.500,000, up from 67,500 in 2022
  • The employee compensation limit for calculating 401k contributions is $330,000, up from $305,000 in 2022

Solo 401k contribution limits 2023

A solo 401k plan is a type of 401k plan with one participant. Those are usually solo entrepreneurs, consultants, freelancers, and other small business owners. Self-employed individuals can take advantage of solo 401k plans and save for retirement.

  • The maximum contribution limit in 2023 for a solo 401k plan is $66,000 or $73,500 with catch-up contributions. Solo entrepreneurs can make contributions both as an employee and an employer.
  • The employee contribution cannot exceed $22,500 in the solo 401(k) plan for 2023.
  • Self-employed 401k participants, age 50 or over, are eligible for an additional catch-up contribution of $7,500 in 2023.
  • The total self-employed compensation limit for calculating solo 401k contributions is $330,000.
  • Employer contribution cannot exceed 25% of the compensation
  • If you participate in more than one 401k plan simultaneously, you are subject to the same annual limits for all plans.

Please note that if you decide to hire other employees, you must include them in your 401k plan if they meet the plan eligibility requirements.

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