The 401k limit for 2023 is $22,500, the same for both traditional and Roth 401ks. The limit does not include catch-up contributions of $7,500 for individuals aged 50 or older. Roth 401ks have income limits and phase-out ranges for contributions. The 401k limit applies to the total amount you can contribute to your 401k plan, including employee contributions and employer matching contributions. It is important to note that the 401k limit is per individual, per year, regardless of whether you have multiple 401k plans.
401(k) Contribution Limits
401(k) plans are retirement savings accounts offered by many employers. They allow employees to contribute a portion of their salary on a pre-tax basis, reducing their current taxable income. Contributions grow tax-deferred, meaning no taxes are due until funds are withdrawn in retirement.
The IRS sets annual limits on how much employees and employers can contribute to 401(k) plans. These limits are adjusted periodically to keep pace with inflation.
Employee Contribution Limits
- Traditional 401(k) plans: For 2023, the limit is $22,500 (plus a catch-up contribution limit of $7,500 for individuals age 50 and older).
- Roth 401(k) plans: The Roth 401(k) contribution limit is also $22,500 for 2023, with the same catch-up contribution limit of $7,500.
Employer Contribution Limits
- Traditional 401(k) plans: Employers can contribute up to 100% of an employee’s compensation (not to exceed the annual compensation limit of $330,000 for 2023).
- Roth 401(k) plans: Employer contributions to Roth 401(k) plans are not subject to an annual limit.
It’s important to note that the employee and employer contribution limits are independent of each other. This means that an employee can contribute up to the employee limit, even if their employer does not make any contributions.
Roth 401(k) vs. Traditional 401(k)
| Feature | Roth 401(k) | Traditional 401(k) |
|---|---|---|
| Contributions | After-tax | Pre-tax |
| Taxes in retirement | Tax-free | Taxed |
| Contribution limits | Same as traditional 401(k) | Same as traditional 401(k) |
| Employer contributions | No limit | Limited to 100% of employee compensation |
| Withdrawal rules | Qualified withdrawals are tax-free | Withdrawals before age 59½ may be subject to taxes and penalties |
Roth 401(k) Eligibility
The 401(k) limit includes Roth 401(k) contributions, but there are separate limits for each type of contribution.
For 2023, the 401(k) contribution limit is $22,500 ($30,000 for individuals age 50 and older).
The Roth 401(k) contribution limit is $6,500 ($7,500 for individuals age 50 and older).
You can contribute up to the annual limit for each type of contribution, or you can divide your contributions between the two types of accounts.
| Contribution Type | 2023 Contribution Limit |
|---|---|
| 401(k) | $22,500 |
| Roth 401(k) | $6,500 |
Tax Treatment of 401(k) and Roth 401(k) Contributions
Both 401(k) and Roth 401(k) accounts offer tax advantages to savers. However, they differ in how contributions are taxed.
401(k) Contributions
- Tax-deferred: Contributions are made pre-tax, reducing your current taxable income.
- Earnings grow tax-deferred until withdrawn in retirement.
- Withdrawals are taxed as ordinary income, regardless of age.
Roth 401(k) Contributions
- Post-tax: Contributions are made after-tax, meaning they do not lower your current taxable income.
- Earnings grow tax-free until withdrawn in retirement.
- Qualified withdrawals (after age 59½ and at least a five-year holding period) are tax-free both on earnings and contributions.
The table below summarizes the key differences in taxation between traditional 401(k) and Roth 401(k) plans:
| 401(k) | Roth 401(k) | |
|---|---|---|
| Contribution | Pre-tax | Post-tax |
| Earnings | Tax-deferred | Tax-free |
| Withdrawals | Taxed as ordinary income | Tax-free or mostly tax-free |
Choosing between a traditional 401(k) and a Roth 401(k) depends on your current income tax bracket, expected tax rate in retirement, and financial goals.
401(k) vs. Roth 401(k) Contribution Limits
The contribution limits for 401(k) and Roth 401(k) accounts are set annually by the Internal Revenue Service (IRS). For 2023, the contribution limit for both types of accounts is $22,500. Additionally, individuals who are age 50 or older can make catch-up contributions of up to $7,500 for a total annual contribution limit of $30,000.
It’s important to note that the contribution limits for 401(k) and Roth 401(k) accounts are separate. This means that you can contribute up to the annual limit for each type of account. For example, if you have both a 401(k) account and a Roth 401(k) account, you can contribute a total of $45,000 for 2023 (plus catch-up contributions if you are eligible).
Withdrawal Rules for 401(k) and Roth 401(k) Accounts
The withdrawal rules for 401(k) and Roth 401(k) accounts vary depending on the type of account and the age of the account holder.
401(k) Accounts
- Age 59½ and older: Withdrawals can be made at any time without penalty.
- Age 55 and older and separated from service: Withdrawals can be made without penalty.
- Under age 59½: Withdrawals are subject to a 10% early withdrawal penalty, plus income taxes.
Roth 401(k) Accounts
- Age 59½ and older: Withdrawals of both contributions and earnings can be made at any time without penalty or taxes.
- Under age 59½: Withdrawals of contributions can be made at any time without penalty or taxes, but earnings are subject to a 10% early withdrawal penalty, plus income taxes.
401(k) Roth 401(k) Contribution limit (2023) $22,500 $22,500 Catch-up contribution limit (age 50+) $7,500 $7,500 Withdrawal age without penalty 59½ 59½ Withdrawal rules for contributions No penalty under any age No penalty under any age Withdrawal rules for earnings 10% penalty under age 59½ 10% penalty under age 59½ Thanks for sticking with me to the end of this article. I hope you found it helpful and informative. If you have any other questions about 401(k) limits or Roth accounts, feel free to reach out. I’m always happy to help. In the meantime, be sure to check back for more great articles on all things personal finance. See you soon!