2023 Updates to Retirement Contribution Limits & Catch-up Contributions

 

One key to a comfortable, well-funded retirement is understanding the 401(k) and individual retirement account (IRA) contribution limits and catch-up contributions. Understanding the rules and opportunities surrounding your retirement accounts can be the key to securing the future you've always dreamed of.

Additionally, retirement contributions come with potential tax benefits and implications. Below are the 2023 IRA and 401(k) contribution limits and some crucial considerations. Whether you’re nearing retirement and seeking to supercharge your nest egg or a diligent saver eager to maximize your retirement fund, catch-up contributions can make a big difference in helping you reach your goals.

What are the 2023 Retirement Contribution Limits?

Knowing the annual 401(k) contribution limits is essential to maximize your retirement savings while ensuring you don’t contribute too much and incur hefty fines. Below are the 2023 contribution limits for each type of retirement plan:

  • Traditional and Roth IRAs: $6,500 (increased from $6,000 in 2022)

  • 401(k), 403(b), 457 Plans: $22,500 (increased from $20,500 in 2022)

  • SIMPLE Plans: $15,500 (increased from $14,000 in 2022)

What is the total combined limit for employer and employee contributions? The combined employee and employer 401(k) contributions limit is $66,000. Your total contributions can’t be higher than your annual salary from the employer that provides your plan.

What if I have multiple 401(k)s? The maximum applies across all of your accounts. That means if you’re under 50 and have a traditional 401(k) and a Roth 401(k), your total contributions cannot exceed $22,500 in 2023. This also applies if you have plans through different employers.

What if I also have an IRA? The 401(k) contribution limits are separate from your IRA, meaning you can save the maximum amounts in both a 401(k) and an IRA.

What are Catch-up Contributions?

Catch-up contributions are extra contributions made to your retirement account. You can make catch-up contributions for the current tax year if you are 50 years or older at the end of this year. In other words, even if you don’t turn 50 until December 1, 2023, you are considered 50 as of January 1, 2023, and are eligible to make catch-up contributions this year. 

John James, managing director of Vanguard’s institutional investor group, explained in their annual “How America Saves” report that people should save at least 12% to 15% of their pay to reach their retirement goals. James says that while Vanguard’s participants are not there yet, they’re close, with 20% of participants needing a 1% to 3% boost.

A recent CNBC Your Money survey also found that 56% of Americans feel they’re not on track to retire comfortably, despite 46% stating they contribute as much as they can afford to their 401(k).

All this to say, catch-up contributions can help close that gap and put you in a better position for retirement if you haven’t saved as much as you’d like in previous years.

Individuals over the age of 50 can contribute the following for each type of plan:

  • Traditional and Roth IRAs: $1,000

  • 401(k), 403(b), 457 Plans: $7,500 (increased from $6,500 in 2022)

  • SIMPLE Plans: $3,500 (increased from $3,000 in 2022)

That means you can contribute a maximum of the following for 2023:

  • Traditional and Roth IRAs: $7,000

  • 401(k), 403(b), 457 Plans: $30,000

  • SIMPLE Plans: $19,000

Update on high earners: Starting in 2024, higher earners—those who make over $145,000 from one employer—can only make catch-up contributions to Roth 401(k)s. 

Why Should I Make Catch-up Contributions?

Catch-up contributions can significantly impact your retirement savings, especially if you’re getting a late start or haven’t been able to save as much as you’d like for retirement. Making catch-up contributions can provide the following:

  • Accelerated Savings: Catch-up contributions allow you to contribute more money to your retirement accounts during your later working years. These extra savings can help you reach your retirement savings goals more quickly.

  • Compound Interest: The power of compound interest means that your savings can grow significantly over time. By making larger contributions, you increase your principal amount and earn more interest on that larger balance, potentially leading to substantial growth over the long term.

  • Tax Advantages: Contributions to 401(k) plans are typically tax-deductible, which can reduce your taxable income for the year. This effectively lowers the cost of saving for retirement, something to consider as you prepare for the 2023 tax season.

  • Security in Retirement: Increasing your retirement savings through catch-up contributions gives you a bigger nest egg to rely on, potentially reducing the risk of outliving your savings.

  • Catching Up: As the name implies, catch-up contributions offer a valuable opportunity to make up for lost time. 

While it’s ideal to start saving for retirement early, it’s never too late to take advantage of catch-up contributions!

What Should I Consider Before Making Catch-up Contributions?

Although catch-up contributions offer significant benefits, you should keep the following in mind:

  • Income: You need to have the financial means to make catch-up contributions. Ensure that your budget allows for these additional savings.

  • Annual Limits: As explained above, you’ll need to ensure you don’t overcontribute, which can result in penalties as high as 10% and unpaid income taxes on the excess contributions when you withdraw them!

  • Investment Strategy: A well-thought-out investment strategy within your retirement accounts is crucial. The returns on your investments will play a significant role in your overall retirement savings growth.

  • Diversification: Diversifying your investments can help manage risk. Consult a financial advisor to ensure your portfolio aligns with your risk tolerance and retirement goals.

While catch-up contributions can be a valuable tool for boosting your retirement savings, they are most effective when used with a comprehensive retirement plan. Work with your tax professional and financial advisor to create a retirement strategy tailored to your needs and circumstances. And always stay attuned to changes in tax laws or contribution limits.

Do you need tax guidance regarding your retirement investments? Speak with JLS Accounting today to learn how our tax professionals can help you ensure your financial health and future.