What Are the 401(k) Contribution Limits for 2022 and 2023?

What if you happen to had entry to the identical sort of investing account millionaires use to construct their wealth? You’d bounce on the possibility, proper? Effectively, you do! Consider it or not, millionaires don’t roll the cube on flashy funding tendencies. Nope! Greater than anything, they make investments cash of their humble, unflashy 401(okay) plan at work.

That’s proper! In accordance with The National Study of Millionaires, eight out of 10 millionaires invested of their firm’s 401(okay) plan. They put cash into their accounts month after month, yr after yr, till someday they appeared up and their internet price was within the seven figures. And if they’ll do it, you’ll be able to too!

Your 401(okay) is a simple and efficient (clearly!) method to put hundreds of {dollars} away every year for retirement. So if you happen to’re one of many tens of millions of People with access to a 401(k), don’t take it without any consideration!

However simply how a lot can you set into your 401(okay) in 2021 and 2022? Let’s have a look.

401(okay) Contribution Limits For 2022

401(okay) Contribution Limits For 2023

What Are the 401(okay) Contribution Limits for 2022 and 2023?

You may make investments as much as $20,500 in 401(okay) plans in 2022, and anybody age 50 or older can put in an additional $6,500 as a “catch-up” contribution (that’s a grand whole of $27,000 for these protecting rating). That quantity has been the identical for a few years. However in 2023, the 401(okay) contribution restrict will increase to $22,500—about time, proper? You’ve received wealth constructing to do! The catch-up contribution bumps as much as $7,500.³

These limits additionally apply to of us with 403(b)s, most 457 plans, and the federal government’s Thrift Financial savings Plan (TSP). Most often, all of your contributions to a 401(okay) are due on the finish of the calendar yr.

And these contribution limits apply to traditional 401(k)s and Roth 401(k)s. Each are employer-sponsored retirement financial savings accounts, however they’re taxed in a different way. You set cash into a conventional 401(okay) earlier than any taxes are taken out of your paycheck. Which means you’ll get a tax break now, however you’ll pay taxes on withdrawals afterward in retirement.

With a Roth 401(okay), it’s the opposite method round! The cash you set in has already been taxed, so it grows tax-free and you gained’t should pay any taxes while you take that cash out in retirement. (For the file, if your organization affords a Roth 401(okay) choice, benefit from it! It simply doesn’t get any higher than tax-free progress!)  

What Is the Most an Employer Can Contribute to Your 401(okay) in 2022 and 2023?

Effectively, possibly there may be one factor higher than tax-free progress—and that’s free cash! The most effective issues a couple of 401(okay) is that almost all employers supply some form of match in your contributions, often as much as a sure share of your wage. In actual fact, about 85% of corporations with a 401(okay) plan present a match on worker contributions.⁴ And the typical employer 401(okay) match is round 4.4% of your wage.⁵ For an worker who makes $50,000 a yr, that’s an extra $2,200 devoted to their retirement financial savings every year. That’s free cash that can assist you construct wealth! 

However there’s a restrict on how a lot you and your employer can put in collectively. Between you and your employer, the utmost that may be put into your 401(okay) in 2022 is $61,000 (if you happen to add catch-up contributions, that restrict rises to 67,500). For 2023, that quantity jumps as much as $66,000 (73,500 with catch-up contributions.⁶

Is There an Revenue Restrict for Contributing to a 401(okay)?

Not precisely. When you have entry to a 401(okay) plan at work, you’ll be able to put cash into it regardless of how excessive or how low your wage is. However hear up, high-income earners: The IRS does restrict how a lot of your wage and compensation is eligible for a 401(okay) match.

ADVERTISEMENT

For 2022, the compensation restrict (which is the quantity of your revenue that’s used to determine 401(okay) contributions and matches) is proscribed to $305,000. So hold that in thoughts! In 2023, the compensation restrict will increase to $330,000.⁷

Right here’s the way it works. Let’s say you make $500,000 in 2022 and your organization affords a 4% match in your 401(okay) contributions. You contribute $20,500—the utmost quantity you’re allowed to place into your 401(okay) in 2022. However as an alternative of matching that $20,500 (4% of $500,000 is $20,000), your employer solely contributes $12,200. Why? As a result of your employer is just allowed to use your match on as much as $305,000 of your compensation, and 4% of $305,000 is $12,200.

No—it doesn’t actually make sense. However don’t let that cease you from utilizing all of the instruments you need to construct wealth for the long run!

How A lot Ought to You Save for Retirement?

To start out, invest 15% of your gross income into retirement financial savings accounts like a Roth 401(okay) and Roth IRA. Unfold your cash evenly throughout four types of mutual funds—progress and revenue, progress, aggressive progress, and worldwide—inside these retirement accounts.  

And hear, we all know you’re keen to begin saving cash in your retirement future . . . however if you happen to’re nonetheless getting out of debt or must get a stable emergency fund in place, now shouldn’t be the time to save lots of for retirement. Your revenue is your primary wealth-building device, and you may’t take full benefit of it if it’s tied up in bank card or scholar mortgage funds.

So let’s say you’re out of debt with a fully funded emergency fund and you’ve got an annual wage of $75,000. Which means your objective is to save lots of $11,250 every year for retirement. The place do you begin? Let’s stroll by it step-by-step.

1. Take the 401(okay) match.

Does your office give you a 401(okay) with an employer match? That’s the good place to begin saving for retirement! Your first step is to speculate as much as the match into your 401(okay).

So if you happen to make $75,000 per yr and your employer matches 5% of your contributions, you need to make investments your first 5% (which comes out to $3,750) into your 401(okay) so you may get that match (aka free cash!). And hear, don’t depend your employer’s match as a part of your 15%. Consider the match because the icing on the cake and never a part of the cake itself.

What in regards to the remaining 10%? Effectively, you probably have a Roth 401(okay) and you want your funding choices, then you can go on forward and make investments your total 15% proper there. Executed! However if you happen to solely have a conventional 401(okay), then it’s time to speak in regards to the Roth IRA.

2. Contribute to a Roth IRA.

The Roth IRA is the peanut butter to the 401(okay)’s jelly—they only go higher collectively! The attractive factor in regards to the Roth IRA, which stands for particular person retirement account, is that it enables you to take pleasure in tax-free progress and tax-free withdrawals in retirement. There it’s once more! Tax-free . . . don’t you simply love the sound of that?

In 2022, you’ll be able to put as much as $6,000 ($6,500 in 2023) right into a Roth IRA (and an additional $1,000 catch-up contribution if you happen to’re age 50 or older).⁸ Sticking with our instance above, maxing out your Roth IRA and investing $6,000 into your account brings your whole retirement financial savings for the yr to $9,750 . . . just a bit bit in need of your retirement financial savings objective.

So what are we going to do with the remaining $1,500? It’s time to ship you again . . . again to the 401(okay)!

3. Make investments the remainder in your 401(okay).

If you happen to invested as much as the match in your 401(okay), maxed out your Roth IRA and nonetheless haven’t hit 15%, don’t panic! You may nonetheless return and make investments the remainder in your 401(okay).

On this case, you’d make investments the remaining $1,500 into your 401(okay). Woo-hoo! You hit 15%!   

Work With a Monetary Advisor

Whether or not you may have questions on your 401(okay) funding choices or need to open up a Roth IRA, working with a trusted and certified monetary advisor can go a good distance. They will help reply all of your investing questions and provide the steering it is advisable begin investing for retirement and constructing wealth.

Don’t have an advisor? We will help with that! Our SmartVestor program can join you with as much as 5 monetary advisors who’re prepared that can assist you take the subsequent step towards the retirement you’ve at all times dreamed about.

Able to get began? Find your SmartVestor Pro today!