A 401k contribution is a type of retirement savings account. It is offered by many employers in the United States. The money that you contribute to your 401k is invested in a variety of assets, such as stocks, bonds, and mutual funds. The money in your 401k grows tax-free until you withdraw it. When you retire, you can withdraw the money from your 401k tax-free. The annual contribution limit for 401k plans for 2023 is $22,500 ($30,000 for those age 50 and older). In addition to your own contributions, your employer may also contribute to your 401k.
Contribution Limits for 401(k) Plans
401(k) plans are employer-sponsored retirement savings plans that allow employees to save for retirement on a tax-advantaged basis. Employees can contribute a portion of their paycheck to their 401(k) plan, and those contributions are deducted from their taxable income.
The contribution limits for 401(k) plans are set by the Internal Revenue Service (IRS) and are adjusted annually for inflation. For 2023, the contribution limits are as follows:
- Employee elective deferrals (employee contributions): $22,500
- Employer matching contributions: $11.250 + up to 100% of elective deferrals
- Catch-up contributions (for participants age 50 or older): $7,500
In addition to these limits, there is also an overall limit on the amount of money that can be contributed to a 401(k) plan each year. For 2023, the overall limit is $66,000 (including employee elective deferrals, employer matching contributions, and catch-up contributions).
| Contribution Type | 2023 Limit |
|---|---|
| Employee elective deferrals | $22,500 |
| Employer matching contributions | $11.250 + up to 100% of elective deferrals |
| Catch-up contributions | $7,500 |
| Overall limit | $66,000 |
What is a Normal 401k Contribution?
A 401k is a retirement savings plan sponsored by an employer that offers employees a way to save money for retirement. Employees can contribute a certain amount of their paycheck to a 401k plan on a pre-tax basis, meaning the money is deducted from their paycheck before taxes are calculated.
There are two common types of 401k plans:
- Traditional 401k: Contributions are deducted from your paycheck pre-tax, reducing your current taxable income. Earnings on your contributions grow tax-deferred until you make withdrawals in retirement, which are then taxed as ordinary income.
- Roth 401k: Contributions are made after taxes, meaning they do not reduce your current taxable income. Earnings on your contributions also grow tax-deferred. Unlike a traditional 401k, withdrawals in retirement are tax-free.
Employer Matching Contributions
Many employers offer a matching contribution to their employees’ 401k plans. This means that the employer will contribute a certain amount of money to the employee’s 401k for every dollar that the employee contributes, up to a certain limit.
For example, if an employer offers a 50% match, and an employee contributes $1,000 to their 401k, the employer will contribute an additional $500. This can be a great way to increase your retirement savings without contributing more of your own money.
How Much Should You Contribute?
The amount you should contribute to your 401k depends on a number of factors, including your age, income, and retirement goals. However, as a general rule of thumb, it is a good idea to contribute as much as you can afford.
The table below shows the maximum amount that employees can contribute to a 401k plan in 2023:
| Traditional/Roth 401k | Catch-up Contributions (Age 50+) | |
|---|---|---|
| Employee Contribution Limit | $22,500 | $7,500 |
In addition to your own contributions, you may also be able to contribute to your spouse’s 401k plan if they are employed. The maximum amount that you can contribute to a spouse’s 401k plan is the same as the maximum amount that you can contribute to your own plan.
401k Contribution Limits
The amount you can contribute to your 401(k) each year depends on your age and income. For 2023, the contribution limit is $22,500. If you’re 50 or older, you can contribute an additional $7,500 in catch-up contributions, for a total of $30,000.
Catch-Up Contributions
- You can make catch-up contributions if you’re 50 or older.
- The catch-up contribution limit is $7,500 for 2023.
- Catch-up contributions are not subject to the same income limits as regular contributions.
- You can make catch-up contributions to both traditional and Roth 401(k)s.
Employer Matching Contributions
Many employers offer matching contributions to their employees’ 401(k)s. This means that the employer will contribute a certain amount of money to your 401(k) for every dollar you contribute, up to a certain limit. The employer’s matching contribution limit is not included in the $22,500 contribution limit.
How Much Should You Contribute?
The amount you should contribute to your 401(k) depends on your individual circumstances. However, as a general rule of thumb, you should try to contribute at least enough to get the full employer match. If you can afford to contribute more, that’s even better.
Table of 401(k) Contribution Limits
| Age | Regular Contribution Limit | Catch-Up Contribution Limit | Total Contribution Limit |
|—|—|—|—|
| Under 50 | $22,500 | $0 | $22,500 |
| 50 or older | $22,500 | $7,500 | $30,000 |
Understanding 401(k) Contributions
A 401(k) is a retirement savings plan offered by many employers in the United States. It allows employees to contribute a portion of their income on a pre-tax or post-tax basis, which can reduce their current taxable income.
Roth vs. Traditional 401(k) Contributions
Roth 401(k) Contributions
- Contributions are made on an after-tax basis, meaning they are not tax-deductible.
- Withdrawals in retirement are tax-free, provided they meet certain conditions (e.g., age 59 ½ or after death).
Traditional 401(k) Contributions
- Contributions are made on a pre-tax basis, which reduces current taxable income.
- Withdrawals in retirement are taxed as ordinary income.
Employer Matching Contributions
Many employers offer matching contributions to their employees’ 401(k) plans. These contributions are typically free money that can boost your retirement savings significantly. It’s essential to take advantage of matching contributions to the fullest extent possible.
Annual Contribution Limits
The Internal Revenue Service (IRS) sets annual contribution limits for 401(k) plans. The limit for 2023 is $22,500 ($30,000 for those age 50 and older).
Employer Contribution Limits
Employers are also subject to contribution limits. For 2023, the employer contribution limit is 100% of the participant’s compensation or $66,000 ($73,500 for those age 50 and older), whichever is less.
Table: 401(k) Contribution Limits
| Contribution Type | 2023 Limit |
|---|---|
| Employee (Roth or Traditional) | $22,500 |
| Employer (Pre-Tax) | 100% of compensation or $66,000 |
| Employer (After-Tax) | $66,000 |
Thanks for hanging out and learning more about 401k contributions. Now you have a better understanding of what the norm is and can start planning your contributions accordingly. Keep in mind that this is just a starting point and you should always consult with a financial advisor to determine what’s right for you. In the meantime, check back later for more helpful tips and insights on personal finance. We’re always here to help you make the most of your money.