- 401k contribution limit for 2022: The 401k contribution limit for 2022 is $61,000 ($67,500 if you’ll be at least 50 years of age by December 31, 2022). Employees are allowed to contribute up to 100% of their income up to $20,500 ($27,500 if 50 years of age or older).
- 401k contribution limit for 2023: The 401k contribution limit for 2023 is $66,000 ($73,500 if you’ll be at least 50 years of age by December 31, 2023). Employees are allowed to contribute up to 100% of their income up to $22,500 ($30,500 if 50 years of age or older).
- When is the 401k contribution deadline: The 401k contribution deadline is December 31 each year. For 2022, the 401k deadline is December 31, 2022. For 2023, the 401k deadline is December 31, 2023.
A company 401k plan helps employees save for their retirement. Most employers will offer a 401k account to their employees, with many plans deducting automatic contributions from their checks each month.
The IRS sets a limit each year on how much you can contribute. There’s a set limit for how much employees and employers can contribute to a plan.
This guide breaks down the 401k contribution limits for 2022, as well as the upcoming 401k contribution limits for 2023.
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Why is there a limit on 401k contributions?
401k contributions are tax-advantaged. When you contribute to a 401k, the contributions get tax deferred – meaning, the amount gets deducted from taxable income. You don’t have to pay any taxes on the contributed amount until you reach 59½ years old, which is the age you can start taking qualified distributions from your plan.
If there was no limit on 401k contributions, high income earners could just defer an unlimited amount of money in taxes each year. The IRS would never be able to collect any income tax, since there’s no ceiling on how much people can deduct from their taxable income.
401k contribution limits for 2022
In 2022, the total contribution limit for a 401k plan is $61,000. If you’re 50 years of age or older, the contribution limit is $67,500.
Employees are allowed to contribute up to 100% of their income up to a maximum of $20,500 ($27,000 if over 50), which leaves $40,500 in room remaining. The left over room is filled by employer match contributions and you can also choose to make after-tax contributions if you have spare cash left over.
You can also choose to make after-tax contributions and then immediately roll them over to a Roth IRA plan. This is known as the mega backdoor Roth. Not every company allows employees to do the mega backdoor Roth.
Also read: 50 Notable Companies That Provide The Mega Backdoor Roth IRA.
401k contribution limits for 2023
Each year, the IRS increases the 401k contributions limits to adjust for inflation.
In 2023, the total contribution limit for a 401k plan is $66,000. If you’re 50 years of age or older, the contribution limit is $73,500.
Employees are allowed to contribute up to 100% of their income up to a maximum of $22,500. If you’re 50 years of age or older, you can contribute up to $30,000 in 2023. This leaves $43,500 in room remaining for employer match contributions to your account, and for making additional after-tax contributions.
Employer contribution limits
Employers are allowed to contribute to an individual’s 401k through employer matched contributions or through nonelective contributions.
If you have a side hustle with no full-time employees, you could be eligible for a solo 401k, which allows you to contribute as both the employee and the employer. You’re allowed to have both a company 401k and a solo 401k.
In an employer match, your company will match your contributions to your account up to a certain percentage of your salary. They can either match your contributions dollar for dollar, or through a percentage of what you contribute.
With a dollar-for-dollar employer match, your employer will contribute 100% of what you contribute (up to a certain amount). So if you contribute $1,000, they’ll also contribute $1,000.
With a partial employer match, your employer will contribute a percentage of your contributions. For example, if a company offers 50% partial employer matching, they’ll contribute $500 when you contribute $1,000.
Usually, companies will contribute between 3% and 6% of an employee’s eligible compensation. Some of the top companies offer employer match contributions up to 25% of an employee’s compensation.
Some companies also offer nonelective contributions to your 401k. Even if you employees don’t contribute anything to their plans, the company will still contribute up to a certain amount. In most cases, nonelective contributions make up a small portion of the total employer match contributions. For example, some companies will offer $500 in nonelective contributions per year, plus employer matching up to a percentage of eligible compensation.
Traditional 401k vs Roth 401k
A 401k plan has two different types of accounts within the plan: A traditional 401k and a Roth 401k.
Not every company offers a Roth option, but if they do, it can drastically increase your tax savings (and account balance) in retirement.
With a traditional 401k, you make contributions with pre-tax dollars. The money you contribute gets deducted from your income tax for the year. So if you make $100,000 and make a $10,000 pre-tax contribution, your new taxable income becomes $90,000.
The downside is that since you didn’t pay any taxes when you contributed, distributions in retirement will get taxed as regular income.
With a Roth 401k, you make contributions with after-tax dollars. The money you contribute doesn’t get deducted from your income tax. However, withdrawals in retirement are completely tax-free.
It works much the same way as a Roth IRA, except that you get to contribute a lot more money to a Roth 401k. A Roth IRA also has income restrictions which prevents high income earners from participating in the plan. A Roth 401k has no income restrictions.
Traditional 401k vs Roth 401k contribution limits
The contribution limits are the same for both accounts. However, they get added together instead of being counted separately.
As an employee, you get to decide which account you want to contribute to, as long as your employer gives you the option to make Roth contributions. The total amount contributed to both accounts per year must not exceed the employee contribution limit. For 2022, that’s $20,500 ($27,000 if over 50). For 2023, that’s $22,500 ($30,000 if over 50).
When can I withdraw from my 401k account?
You can start taking qualified distributions from your account when you reach the age of 59½. Any early withdrawals are subject to a 10% fee plus income taxes on the amount drawn.
Distributions from a traditional 401k get taxed as regular income. You’ll be taxed based on your tax bracket and the tax rates at the time of withdrawal.
Distributions from a Roth 401k are tax-free. Because you already paid taxes when you contributed, you don’t have to pay any taxes when you withdraw from your account.
What if I contribute over the limit?
If you overfund your 401k in any given year, you’ll have to withdraw the excess contributions, which will get counted as an early distribution.
Only distributions after you turn the age of 59½ are considered qualified distributions. Any withdrawals before that are considered early distributions and are subject to a 10% fee plus income taxes on the amount drawn.
In this case, the early withdrawal isn’t for personal reasons, but due to a mistake so you’re forced to take the penalty. If you did over contribute to your 401k, inform your HR department. You’ll have until the federal tax filing deadline to fix your mistake, which for next year is April 18, 2023.
Your HR department will withdraw the excess amount and refund it back to you, and you’ll have to report the distribution and pay any associated penalties and taxes. They’ll also have to issue you a new W-2. Since your contributions may have been deducted from your taxable income for the year, you may have to pay additional tax based on your corrected increase in income.
When is the 401k contribution deadline?
The 401k contribution deadline is different for employee and employer contributions.
For employees, the contribution deadline each year is the last day of the year, December 31st.
- For 2022, the 401k contribution deadline would be December 31, 2022.
- The 2023, the 401k contribution deadline would be December 31, 2023.
For employers, the contribution deadline is the federal tax filing due date, which is typically April 15th, each year. For 2022, April 15 falls on a Saturday and the following Monday is a holiday. Therefore, the federal tax filing deadline is pushed to April 18, 2023.
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