Key points

• Employees can invest more money into 401(k) plans in 2023, with contribution limits increasing from 2022’s $20,500 to $22,500 for 2023.
• The contribution limits for individual retirement accounts (IRAs) also increases, from $6,000 to $6,500.
• If you contribute to a 401(k), you might wonder how much money you can contribute in total. The Internal Revenue Service (IRS) sets specific limits, such as the maximum 401(k) contribution limits for 2023.
• Whether you have a goal in sight or have been curious about the potential amount you can contribute in total, we’ll go over these amounts. Then you’ll know exactly how much you can tell your workplace plan administrator to withhold from your paycheck.
• As you contemplate how to get started, making the 401(k) contribution limits might not seem exciting. It may even seem somewhat stressful because it means you may have a trickier time budgeting from month to month because a larger portion of your income may go to saving for retirement. However, when you see how much of an impact saving  can have on your retirement savings, you’ll realize that contributing the annual max 401(k) amount can benefit your retirement savings plan over the long-term.

In this piece, we’ll review the 401(k) contribution limits for 2022 and 2023. We’ll also go over employer-employee combination contribution limits and the highly compensated contribution limits. Finally, we’ll review traditional and Roth IRA contribution limits.

401(k) contribution limits in 2023

First, what are contribution limits? Contribution limits are set by the IRS and refer to the amounts that can be contributed to a 401(k) each year. The maximum deferral limit refers to the annual amount that an employee can contribute to a 401(k) plan.  The maximum contribution amount, on the other hand, refers to the total amount of funds both the employee and employer can contribute during the year.  Total contributions cannot exceed 100% of an employee’s annual compensation.

In the past, the 401(k) contribution limits have gone up incrementally, typically about $500 each year. For example, in 2017, the contribution limit was $18,000 and the maximum catch-up contribution was $6,000. The contribution limits for employees have generally gone up $500 per year since then.

Let’s look at the 401(k) contribution limits in 2023 compared to 2022:

These amounts also apply to 403(b), most 457 and Thrift Savings Plans. The IRS typically announces official limits for the coming year in late October or early November. You can check the IRS 401(k) contribution limits on the IRS website for all updates.

Employer and employee 401(k) contribution limits

You cannot go over a specified limit for total plan contributions, which applies to the sum of elective deferrals, employer matching contributions, and employer nonelective contributions. We define all these below.

• Elective deferrals: Refers to amounts of money you elect to transfer from your pay and into your employer’s retirement plan.
• Employer matching contributions: Refers to contributions your employer makes to your retirement plan account if you contribute to the plan from your salary. Here’s an example of a common 401(k) matching formula: 50 cents on the dollar up to 6% of the employee’s pay. Not taking advantage of the match means you miss out on additional money in your account, so it’s usually advantageous for you to invest enough to get the match.
• Employer nonelective contributions: When an employer contributes to an employee in an employer-sponsored retirement plan (whether the employee contributes or not), these are employer nonelective contributions.  They are generally also known as profit-sharing contributions. 

How does the catch-up contribution limit work? You can apply the catch-up contribution limit from the start of the year till the end of the year if you are 50 or older during the year. Let’s say you happened to turn 50 on December 31, 2023. You can still take advantage of the catch-up contribution for the entire year.

Tip: You can use Empower’s data-driven financial tools to determine how your contribution may impact your future.

Highly compensated employee 401(k) contribution limits

Highly compensated employees face different limits than non-highly compensated employees.

Who is a highly compensated employee (HCE) and how does being one affect your 401(k) contribution limits? It’s important to know the IRS rules for 401(k) contribution limits. If you own more than 5% of the interest in a business or receive compensation above a certain amount (more than $150,000 in 2023, determined by the IRS), you’re considered a highly compensated employee for 401(k) retirement plan purposes.

You will have to follow more stringent contribution limits. You can take a look at the IRS tests to ensure that you participate in your company plan with the right amount of money.

Traditional vs. Roth 401(k) contribution limits

Some employers offer both a traditional 401(k) and a Roth 401(k), but what’s the difference between each? Let’s walk through the differences between both account types so you can decide which type works best for you.

• Roth 401(k): A Roth 401(k) is a contribution option within an employer-sponsored savings plan that enables you to invest after-tax dollars for retirement. You pay income taxes on your contributions but don’t pay taxes when the amounts are distributed from the plan provided that you take withdrawals after you reach age 59½ and the account has been funded for at least five years. All your accumulated contributions and any earnings may be withdrawn tax free.
• Traditional 401(k): A traditional 401(k) is a contribution option within an employer-sponsored plan that gives you the option to defer paying income tax on the amount you contribute for retirement. For example, let’s say you earn $50,000 and max out your retirement plan at $22,500. Assuming you have no other deductions, your taxable earnings will reduce from $50,000 to $27,500. ($50,000 – $22,500 = $27,500).
• Wondering whether you should contribute to both? You might want to take a tax-diversified approach because it could allow you to invest in many types of assets and allow you to diversify your retirement savings. You can contribute to both a Roth and a traditional 401(k) plan if your total contribution (as an employee) doesn’t go over $22,500 in 2023.
• In addition to Roth and traditional 401(k) plans, some employers also offer an “after-tax plan,” allowing you to save up to the total annual limit of $66,000. This means you can put away after-tax money and any investment growth is tax-deferred in your 401(k) account until withdrawal, at which point taxes would be due.

The bottom line

It’s important to pay attention to 401(k) contribution limits so you don’t go over the limit or contribute too little to meet your goals.

Wonder how your 401(k) balance compares to others who are close to your age? Check out where you fit in with your peers: Empower’s average 401(k) balance by age.

Financial professionals suggest contributing 10% of your salary to your retirement savings plan. It’s also a good idea to at least contribute up to your employer match. Contributing even more beyond your employer’s match may give you a better chance of meeting your savings goals.

Read more: What is 401(k) matching and how does it work?

Remember, preparing for retirement should be part of your overall financial plan. You can take a few actions now to get yourself on the right track.

1. Sign up for the Empower Personal Dashboard. You can use these free and secure professional-grade online financial tools to see all your accounts in one place, analyze your spending, and plan for long-term financial goals.
2. Consider talking to a financial professional for more detailed guidance on your retirement saving strategies.