2023 IRS Updates: 401(k) Contribution Limits, IRA, Roth, and Catch-up Limits

It’s that time of year again; The IRS has announced changes made to retirement accounts for 2023. After a turbulent year in the stock market and inflation running high, the good news is that taxpayers can contribute and save more in their retirement accounts than ever before. Changes are based on the U.S. cost of living increases, and there are some notable changes for those saving in 401(k) accounts.

The IRS announced on October 21st that people can contribute up to $22,500 in 401(k) accounts and $6,500 in IRAs in 2023. Plan participants age 50 or older next year can contribute an additional $7,500, up $1,000 from 2022 (that’s up to $30,000 per year in total excluding any employer match) to their 401(k) accounts.

Inflation Effects In Context

For 401(k)s, that’s an almost 10% increase from 2022’s contribution limit of $20,500. For IRAs, it’s a more than 8% rise from 2022’s limit of $6,000. As added context, the inflation-indexed bumps tax year 2023 income tax brackets and the standard deduction worked to approximately 7%. When the IRS increased the 401(k) contribution limits last year, it came to a roughly 5% rise.

Most 401(k)s allow Roth 401(k) contributions. Employees may choose to put some, none, or all contributions into the Roth 401(k) or tax-deferred option. Do know that all employer match or contribution must be provided on tax deferred basis. Separately, IRA limits increased $500 to $6,500; however, IRA catch-up limits remain unchanged.

An Overview of Changes

• 1 The $22,500 elective deferral limit is also known as the 402(g) limit, after the relevant tax code section. Participants’ annual contributions may not exceed 100% of their compensation.
• 2 The $7,500 catch-up contribution limit for participants age 50 or older applies from the start of the year for those turning 50 at any time during the year.
• 3 Total contributions from all sources may not exceed 100% of a participant’s compensation.
• 4 Includes officers of the company sponsoring the plan.
• 5 For the 2023 plan year, an employee who earned more than $150,000 in 2022 is an HCE.
• ​Source: IRS Notice 2022-55.

The Total Amount You Can Defer Into a 401(k) is Increased to $66,000

Another 401(k) area of importance to note is the amount you can contribute and receive in total to your 401(k) account. If you receive company matching contributions or profit sharing, the all-in tax-deferral limit has been increased from $61,000 to $66,000 for 2023 with those over 50 years able to put in $73,500 with the catch-up. 

Roth IRA Income Phase-out Ranges

• The Roth IRA income phase- out range increased to between $138,000 and $153,000 for singles and heads of household, up from between $129,000 and $144,000. 
• For married couples filing jointly, the income phase-out range is increased to between $218,000 and $228,000, up from between $204,000 and $214,000. 
• The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.

Source: IRS Retirement Plans FAQs

Saver’s Credit or Retirement Savings Contributions Credit

• The income limit for the Saver’s Credit for low- and moderate-income workers is $73,000 for married couples filing jointly, up from $68,000
• $54,750 for heads of household, up from $51,000
• $36,500 for singles and married individuals filing separately, up from $34,000

Closing Thoughts

With the annual increase in the employee contribution limit, a good message for plan participants is that increasing your contribution rate, even by 1 percent, can make a massive difference in how much you accumulate in your long-term retirement savings. It may  seem like a small amount today to many, but can have an outstanding impact on your account balance in 10 or 20 years. As a plan sponsor, It’s the most important time to ensure your plan is staying competitive.

Find more details on the IRS Notice 2022-55.

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