Simple 401k Limits 2023: What You Need to Know
When it comes to retirement planning, an employer-sponsored 401K plan is often one of the most attractive options available. This type of plan is simple, straightforward, and typically offers a number of tax benefits. The only downside is that there are limits to how much you can contribute to your 401K each year. In 2023, the limits are set to change.
Current Limits for 2021-2022
For 2021 and 2022, the 401K contribution limit is $19,500 per year. If you’re age 50 or older, you’re allowed to make an extra $6,500 catch-up contribution, for a total of $26,000. This means that if you’re 50 or older, you can contribute a maximum of $26,000 to your 401K in 2021 and 2022 combined.
2023 Simple 401K Limits
In 2023, the 401K contribution limit is expected to increase to $20,500. If you’re age 50 or older, you’ll be able to make an extra $7,000 catch-up contribution, for a total of $27,000. This means that if you’re 50 or older, you can contribute a maximum of $27,000 to your 401K in 2023.
Factors That Can Affect Your Limit
In addition to the annual contribution limits, there are other factors that can affect how much you can contribute to your 401K. For example, if you’re a high income earner, your 401K contributions may be limited. This is due to the fact that the IRS imposes an “annual additions limit” on contributions. This limit is based on your income and the amount of employee and employer contributions. Additionally, some employers may choose to place their own contribution limits on their 401K plans.
Benefits of Contributing to a 401K
Although the contribution limits on 401Ks can be restrictive, there are several benefits of contributing to a 401K. For one, 401K contributions are generally tax-deductible, which means you can reduce your taxable income. Additionally, many employers offer matching contributions, which can help you maximize your retirement savings. Finally, 401Ks are a great way to save for retirement, as the money you contribute to them will grow tax-deferred and can be withdrawn after age 59 1/2 without paying taxes.
What to Do If You Exceed the Limit
If you exceed the IRS contribution limit, you’ll need to take corrective action. You’ll be required to withdraw the excess contributions, along with any related earnings, by the tax filing deadline for that year. If you fail to do so, you’ll be subject to a 6% excise tax. Additionally, you may also be subject to income taxes on the earnings.
Making the Most of Your 401K
Although the contribution limits on 401Ks can be restrictive, the tax advantages and potential for matching contributions make them a great way to save for retirement. By taking advantage of the annual limits, you can maximize your contributions and take full advantage of the benefits of a 401K. Additionally, it’s important to pay attention to the other factors that can affect your contribution limits, such as the annual additions limit and employer-imposed limits.
Conclusion
When it comes to retirement planning, an employer-sponsored 401K plan is often one of the most attractive options available. The annual contribution limits for 2021 and 2022 are currently set at $19,500 per year, with an extra $6,500 catch-up contribution allowed for those age 50 and older. In 2023, the 401K contribution limit is expected to increase to $20,500, with an extra $7,000 catch-up contribution allowed for those age 50 and older. By taking advantage of the annual limits, you can maximize your contributions and take full advantage of the benefits of a 401K.