The Internal Revenue Service (IRS) has announced a record increase in contribution limits for 401(k) and other tax-deferred retirement plans for 2023.
Starting next year, retirement plan participants are allowed to contribute up to $22,500 to qualified plans such as 401(k)s, 403(b)s, most 457 plans or the Thrift Savings Plan for federal employees.
The increase amounts to $2,000 more (roughly 10%) than the current $20,500 federal contribution limit for 2022. Contribution limits are indexed to inflation, which largely accounts for the size of the increase.
Here are some other 2023 increases to note:
- The catch-up contribution amount for employees 50 and older participating in group retirement plans increases to $7,500 from $6,500.
- IRA contribution limits for individuals have increased to $6,500 (up from $6,000 in 2022). The catch-up contribution amount remains $1,000.
- SIMPLE (savings incentive match plan for employees of small employers) account contribution limits have increased to $15,500 from $14,000. The catch-up contribution limit for SIMPLE accounts has increased to $3,500 (up from $3,000).
- For simplified employee pensions (SEPs), the minimum compensation threshold increased to $750, up from $650. The SEP maximum compensation limit rises to $330,000, up from $305,000.
Encourage employees to ‘max out’
Experts recommend that HR professionals inform employees of their plan’s new contribution limits and encourage them to set the annual limit as their contribution goal for next year. While not everyone can or will fund retirement accounts up to the maximum, the contribution cap is a good goal to pursue. Some have noted that despite the sharp declines in stock and bond funds this year, 401(k) plans continue to see steady contributions. With the annual increase in the employee contribution limit, a good message for plan participants is that increasing your contribution rate, even a little, can make a big difference in your long-term retirement savings.