Here’s the Latest 401k, IRA and Other Contribution Limits for 2023

The best way to improve your cash flow for 2023, is to increase your retirement contributions.

Contributing to a qualified retirement account can save you money on taxes while getting you closer to your financial goals. In order to reap those tax benefits, you’ll need to observe contribution, income and deduction limits set by the IRS.

Contribution limits for employer-based 401k accounts are higher than for traditional and Roth individual retirement accounts (IRAs). To the tune of $22,500 vs. $6,500, respectively for 2023. Here are the contribution and income limits for 2023:

401k Contribution Limits

Contributing to an employer-based 401k, 403b or 457b retirement plans reduce the amount of wages reported on your tax return, thus lowering your taxable income.

For 2023, these elective contributions are limited to $22,500. An increase of $2,000 per person.

Workers who are 50 and older can make an additional $7,500 in catch-up contributions. This is an increase of $1,000.

Many employers also match employee retirement contributions, either dollar for dollar or partially. Make sure you pay attention to the vesting period if any. Some vesting periods are as long as 4 years, so if you quit too soon, you get zero.

Your total contribution including employer-matching funds cannot exceed $66,000—or $73,500 for workers 50-plus. If you aren’t sticking around for the entire time, just remember that you can roll over your contributions through various options.

You really can become a 401k millionaire. It’s more common than you think. Even a contribution of $18,000 per year is worth $1M by year 22.

IRA Contribution Limits

Individual IRA and Roth IRA accounts offer another way to save for retirement. Your total contributions to traditional or Roth IRAs are limited to $6,500 in 2023—an increase of $500 over 2022. The great part is that an investment in an IRA for 30 years at $6,000 per year is worth a Million. Maybe a million tax free if you go the ROTH option.

Taxpayers who are 50 and older can make an additional $1,000 to catch-up.

Your IRA contribution should be made using earned income; to that end, your contribution cannot exceed your taxable compensation for the year.

For example, if you earned $3,500 in 2023, your maximum IRA contribution would be $3,500.

Bonus Contribution Details if Married

Married couples filing jointly can each make the maximum contribution to an IRA as long as their combined income exceeds the amount they’re contributing, even if one spouse doesn’t meet the income requirement. Even a stay at home spouse can open an IRA account.

That’s double the effort.

Check out the 7 things you may not know about IRAs.

IRA contribution limits apply to money you put into traditional and Roth IRAs combined. You can split your total contribution between these two types of accounts, but you can’t contribute $6,500 to each.

This part gets a bit tricky, you might need extra help from your CPA or Certified Financial Advisor who understands Taxation and Retirement Accounts. Make sure your professional understands tax location and tax projection at withdrawal too.

It gets super nerdy and Nostradamus like.

IRA Deduction Limits for 2023

If you participate in a retirement plan at work, such as a 401k, your IRA deduction may be limited based on your income.

Although you can contribute $6,500 (or $7,500 if you’re 50 or older) to a traditional IRA regardless of how much you make, you may not be able to deduct your contribution on your taxes if your income exceeds IRA thresholds.

Stay posted to the IRS’ official website for phase out updates. They usually post by Mid November.

For taxpayers who participate in employer-based retirement plans, here are traditional IRA deduction limits for 2023 based on your modified adjusted gross income (MAGI).

What’s a MAGI? Click here Investopedia provides the best information.

Roth IRA Income Limits for 2023

While you can’t take a tax deduction on a Roth IRA because contributions are made after-tax, Roth IRAs have income limits as well: They indicate how much you can contribute to a Roth, if at all, and they apply whether or not you participate in a 401(k).

The Roth IRA contribution limit for 2023 is $6,500.

The Ultimate HSA Contribution Limits

The Quadruple tax advantage account aka the Health Saving Account (HSA) offers yet another way to save for medical expenses and retirement.

Your HSA contributions are limited to $3,850 in 2023 for singles and $7,700 for families (more than 2).

Taxpayers who are 50 and older also get an additional $1,000 to catch-up.

Basically you have options. In tandem with the other two, you can save as much as $30,000 as a single person or $60,000 as a married couple.

This is an amazing tax location tool which yield multiple options when withdrawing later. Here are more reasons to use a HSA as a retirement tool, 5 ways HSAs can help with your retirement.

What to Do if You Contribute Too Much to an IRA, 401k, or HSA

Contributing too much money to your IRA or 401(k) plan could lead to additional tax. Excess contributions and any interest or gains they earn are taxed at 6% per year for each year the money remains in your retirement account.

This tax cannot exceed 6% of the combined value of your IRA accounts at the end of the year.

How to Avoid Paying Tax on Excess Contributions

You can avoid paying the 6% tax by withdrawing excess contributions, along with any earnings they’ve generated, before the due date for individual tax returns. The deadline is April 15, 2023 (tax filing deadline).

Just make sure you are timely. And try to make any request at least a month prior to the April 15 deadline. No need to wait until the last second.

Contact your 401k plan administrator to request a corrective distribution that includes the excess money you contributed and the interest or appreciation you earned on it.

They should issue an amended W-2 with your distributed funds added to your wages for the year. If you over contributed to an IRA, follow the same steps with your financial institution.

You should receive Form 1099-R, which shows what you made on your excess contribution so you can add it to your taxable income.

What if You Miss the Deadline?

If you don’t remove your excess contributions before the tax filing deadline, you’ll pay a 6% tax on that money. And since the 6% penalty tax applies for each year the money remains in your account, you’ll likely pay twice—once for the prior year and again for the current one.

Make the corrective withdrawal as soon as possible to avoid paying another 6% when a new year begins.

Maxing Out Your Retirement Contribution

Maxing out your retirement accounts is sound financial advice, but it does require you to understand annual contribution limits but your HR will remind you annually. Especially when it comes to a 401k, it won’t allow you to over-fund your account.

As long as you meet IRS guidelines, contributing to a 401k, traditional IRA or Roth IRA, and a Health Savings Account can offer a myriad of tax advantages. These advantages catapult your net worth and Debt to Income ratio.

How much is the growth worth (without the employer’s match)?

Years	Total Contributions	Compounded Interest	Total
5	$150,000	$32,362	$182,362
10	$300,000	$150,311	$450,311
20	$600,000	$822,498	$1,422,498
30	$900,000	$2,621,377	$3,521,377

Years	Total Contributions	Compounded Interest	Total
5	$300,000	$64,723	$364,723
10	$600,000	$300,621	$900,621
20	$1,200,000	$1,644,995	$2,844,995
30	$1,800,000	$5,242,753	$7,042,753

Even the matching contribution of just $4,000 per year is worth $469,513 in 30 years. We can’t make this up. My personal 401k grew to $150,000 in 4 years. Don’t sleep on the power of compounding your efforts.

But what about the taxes?

You are indeed correct. There will be taxes. However, it’s all based on your withdrawal rate. Beyond that, those it really matter if you can live off your hard earned savings for the rest of your life like a Boss?

I think not. But then again, you earned your dollars. How you spend it is up to you. I rather pay less taxes personally.

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