Each year, the IRS sets four annual limits for different aspects of 401(k) retirement plan contributions. Beginning in 2023, the changes to these limits will be of greater magnitude due to record inflation and cost of living increases we’ve observed in the past year. As many people utilize these employer-sponsored retirement plans, it is important to be informed about these changes and how they will impact your behavior as you contribute to these plans.
To understand each of these changes, you must first know the four annual contribution limits. These are the elective deferral limit, employer contribution limits, catch-up contribution limits (for individuals over the age of 50), and maximum total contribution limits.
There are two main types of contributions that are made towards 401(k) plans: elective deferral and matching contribution. Elective deferral contributions are the individual contribution of a worker or employee, while the matching contributions are the contributions made on behalf of your employer.
In 2022, the IRS designated that the maximum employee (elective deferral) annual contribution limit across all 401(k) and 403(b) plans was $20,500. In 2023, this level will rise by nearly 10% to $22,500.
Additionally, the maximum annual contribution limit has increased from $61,000 in 2022 to $66,000 in 2023. This includes elective deferrals (employee contributions), employer matching and discretionary contributions. It excludes catch-up contributions for people over 50.
Catch-up contributions are additional contributions made by individuals over the age of 50 to increase the size of their portfolio before they reach retirement age. In 2023, this amount will increase for the first time in several years, rising from $6,500/year to $7,500 per year.
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