Everything To Know About 401(k) Contribution Limits For 2023

There are many different ways that you can save for retirement, and each method comes with its own pros and cons. Some types of retirement accounts, including Individual Retirement Accounts (IRAs) and 401(k) accounts, come with certain limits about who can contribute, and how much. The IRS sets 401(k) contribution limits that restrict the amount of money that people can contribute to employee-sponsored plans like 401(k) plans.

What Are 401(k) Contribution Limits?

The IRS sets contribution limits to ensure that tax-deductible and tax-advantaged accounts are used in the manner that benefits the overall tax code. Setting contribution limits on retirement accounts like 401(k) accounts make sure that low- and middle-income taxpayers can save in their retirement plan while not allowing the ultra-wealthy to shelter hundreds of thousands or even millions of dollars from income taxes.

401(k) Contribution Limits For 2023

For 2023, the IRS announced the overall 401(k) contribution limit for individuals under 50 is $66,000, or $73,500 for individuals age 50 or older. The IRS sets these limits so highly compensated employees don’t take advantage of these investments.

Understanding Employer Match 401(k) Contributions

A common employer perk is the matching of employee 401(k) contributions. Depending on the plan, an employer may choose to match 25%, 50% or even 100% of employee contributions – up to a certain amount. One scenario might be an employer who chooses to match 50% of their employees' contributions, up to a maximum of a 6% contribution. So in this scenario, it makes even more sense to contribute at least 6% of your salary to your 401(k) plan in order to maximize the employer match.

Highly Compensated Employee Limits

If you’re a manager, owner or other highly compensated employee of a company, you may have additional contribution limits to any retirement plan sponsored by your company. The IRS has set additional guidelines for highly compensated employees to make sure that wealthier employees don't unfairly benefit from the way a 401(k) plan is set up. The IRS uses something called the actual deferral percentage (ADP) test. The ADP test makes sure that all employees have the opportunity to participate proportionally in any company-sponsored plan.

Do Employer Contributions Affect 401(k) Limits?

A benefit to enrolling in your employer’s match program is that employer matches don’t count toward your personal maximum 401(k) contribution limit ($22,500 in 2023). However, there is a cap on the number of employer and employee contributions made to one 401(k) account in a year. That limit is currently $66,000 for 2023 for employees under the age of 50.

How Much To Contribute To Your 401(k) Plan

Deciding how much to contribute to your 401(k) plan will be an important consideration in your overall budget and financial planning. Generally, if your employer offers any sort of 401(k) match as part of your benefits program, you will be best off if you contribute at least to the matching amount. That employer match represents "free money" and it's usually a good idea to take advantage of it. Another thing to consider is that if you're over age 50, you can contribute additional money to your plan. If you want to crunch the numbers and see what might make sense for your specific situation, consider using our free retirement calculator.

What To Do If You Exceed Your 401(k) Limit

If you only have one employer during the year (and thus only one 401(k) plan), it’s rare to exceed your 401(k) limit, since your employer will likely stop you automatically. But if you have multiple employers and/or you switch jobs during the year, you may end up accidentally contributing too much. If you find you've exceeded the maximum limit, contact your employer or plan administrator as soon as possible. The sooner you notify them, the less chance that you will have to pay taxes on the excess contribution.

Tips For Maximizing 401(k) Contributions

Here are a few helpful tips for maximizing 401(k) contribution limits and strategies to increase one's retirement savings.

1. Take advantage of your employer's matching dollars, if offered.
2. Use the 50/30/20 rule as part of your budget to make sure you maximize the amount you're saving.
3. Match the available fund offerings in your 401(k) plan to your age, investment horizon and risk tolerance.
4. Pay attention to any fees associated with the different investment options in your plans. Many funds in 401(k) plans have higher-than-average investment fees.
5. Don't forget to take advantage of catchup contributions if you are age 50 or older.

The Bottom Line

The IRS sets guidelines for the maximum amount that employees and employers can contribute to a 401(k) plan. This ensures that lower- and middle-income employees can get tax breaks for saving for retirement without overly benefitting the ultra-wealthy. The maximum amount an employee can contribute to a 401(k) plan in 2023 is $22,500, though those over age 50 can contribute extra. An employer's matching contributions do not count towards this maximum, which may allow you to boost your retirement account balance.

If you want to monitor and track your 401(k) contributions, consider signing up for a Rocket Money℠ account today.