401(k) Contribution Limits for 2022 and 2023: Maximize Workplace Retirement Savings
Many for-profit businesses, especially larger ones, offer retirement accounts as a benefit for their employees.
One of the more common retirement options is called a 401(k) plan. These plans work in slightly different ways depending on how your employer has set up their plan.
While 401(k) plans are important for your retirement savings, there are annual contribution limits that apply.
Here’s what you need to know to figure out the maximum 401(k) contribution you can make in 2022 and 2023 (if you're planning for the upcoming year).
401(k) Contribution Limits Defined for 2022 and 2023
The IRS sets the contribution limits for 401(k) plans each year.
The contribution limits are the same whether you choose a Roth or traditional 401(k).
- In 2022, the 401(k) contribution limit is $20,500. For people age 50 or older, the contribution limit is $27,000 (due to permitted catch-up contributions of an additional $6,500).
- In 2023, the maximum amount you can generally contribute as an employee is $22,500. For people age 50 or older, the contribution limit is $30,000 (due to permitted catch-up contributions of an additional $7,500).
Employers can also contribute to a 401(k) plan.
Employer matching contributions do not count toward the above limits.
In total, all employee contributions and employer contributions must fall below a particular limit, though.
This limit is either 100% of your compensation or the following numbers, based on your age:
- For people younger than 50: $61,000 for 2022; $66,000 for 2023
- For people age 50 or older (in eligible plans): $67,500 for 2022; $63,500 for 2023;
When determining the amount to contribute to your account, both employees and employers can only consider certain income.
In particular, the compensation cap for considering contributions is $305,000 in 2022 and $330,000.
Highly Compensated Employees May Face Lower Contribution Limits
401(k) plans have special rules that may limit the contributions highly compensated employees can make.
These rules, called discrimination testing rules, help make sure the plan benefits all employees.
They may also apply to managers and owners of the company.
In particular, these rules may limit the contributions you can make to the plan.
Speak with your human resources or 401(k) plan administrator if these rules apply to you to figure out your specific contribution limits.
When Can You Contribute to a 401(k)?
401(k) plan contributions can only be made in the calendar year.
All contributions to a 401(k) plan can only take place from January 1, 2022, through December 31, 2022.
How a 401(k) Plan Works
A 401(k) plan is technically a defined contribution retirement plan some for-profit businesses may offer their employees.
It’s called defined contribution because you specify how much is contributed to the account.
This is different from a defined benefit retirement plan, which is commonly referred to as a pension. These plans define how much money you’ll get at retirement rather than how much you contribute.
401(k) plans may work differently at each employer.
Some only offer traditional 401(k) contribution options.
These allow you to contribute money pre-tax out of your paycheck, saving you money on taxes today.
Earnings grow tax-free in the account.
When you withdraw the money after the set retirement age, you pay ordinary income taxes on the amount withdrawn.
Other 401(k) plans may offer a Roth 401(k) option in addition to the traditional 401(k).
These allow you to contribute money after you pay taxes on it, but it still comes out of your paycheck.
Like a traditional 401(k), the earnings in the account grow tax-free.
When you withdraw money after the set retirement age, you do not pay any taxes on qualified withdrawals.
Traditional 401(k) vs. Roth 401(k)
|Traditional 401(k)||Roth IRA 401(k)|
|Contributions are tax-deductible.||Contributions are not tax-deductible.|
|Pay taxes upon withdrawal.||Earnings can be withdrawn tax-free and without penalties if the funds were in the Roth 401(k) for 5 years and you've reached age 59 1/2.|
|Required minimum distributions (RMDs) are required starting at age 70 1/2.||Required minimum distributions (RMDs) are required starting at age 70 1/2.|
Some employers offer a matching contribution in their 401(k) plans.
These incentivize you to contribute to the plan.
For instance, a plan may match your contributions dollar for dollar up to 3% of your salary.
If you contribute 1%, they will contribute 1%.
If you contribute 10%, they will contribute 3%.
These contributions always go into a traditional 401(k) account.
Can You Contribute to a Roth and Traditional 401(k) at the Same Time?
As long as your 401(k) plan allows it, you can contribute to a traditional and Roth 401(k) simultaneously.
Choosing a Roth or traditional option doesn’t give you access to additional contribution limits.
These contribution limits apply across all 401(k) plans you may have.
If you work two jobs and both offer a 401(k) plan, you must stay under the limits with all accounts each year.
For example, you cannot contribute $19,500 to a Roth 401(k) and $19,500 to a traditional 401(k) the same employer.
You could, however, contribute $5,000 to a Roth 401(k) and $12,000 to a traditional 401(k) at the same employer if they allow it.
What Happens If You Contribute Too Much?
Contributing over the 401(k) contribution limits can cause financial headaches for you.
If you don’t withdraw the excess contribution money in time, you essentially get taxed twice on the money.
Excess contributions are considered taxable in the year you contribute them.
This means you pay taxes on the money in the year of the contribution and in the year you withdraw it.
To avoid this fate, you must withdraw the excess contributions and any associated earnings by April 15 of the year following the excess contribution.
For instance, excess contributions in 2022 must be withdrawn by April 15, 2023.
If you do, you pay taxes on the excess contributions and earnings.
You do not have to pay the 10% early withdrawal penalty, though.
Tips for 401(k) Participants
Investing in a 401(k) can seem overwhelming.
Many 401(k) plans offer an easy solution to this problem.
Target date funds
Target date funds allow you to choose your target retirement date and automatically allocate your investments based on your goal.
These funds aren’t perfect, but selecting one is better than not investing at all.
Another concept to watch out for is a vesting period.
You may not own all or your employer’s match contributions during this period if you leave your job.
Look for a vesting schedule that shows when you earn the employer contributions. They usually phase in over a few years.
For instance, you may vest in 20% of your employer’s contributions each year over a five-year period.
If you leave your job, make sure you continue to manage your old 401(k).
Some people may decide to roll the 401(k) over into a new employer’s 401(k). Others may decide to roll a 401(k) over into an IRA.
You may even be able to leave your old 401(k) at your old employer.
No matter which option you choose, it’s essential to keep track of the account and manage it as part of your overall investment plan.
Options If You Can’t Contribute to a 401(k)
Some types of employers can’t offer 401(k) plans.
In this case, see if your employer offers a similar workplace retirement plan.
This could be a 403(b) plan, 457 plan, SIMPLE IRA, SIMPLE 401(k) plan, or other retirement plans.
Others may technically be allowed to open a 401(k) plan but don’t have the financial means or desire to open this benefit for their employees.
In these cases, you’ll need to take charge of your own retirement savings accounts.
An individual retirement arrangement (IRA) account is likely a good starting place.
These accounts can come in Roth and traditional versions.
You can contribute up to $6,000 to an IRA in 2022 if you’re under age 50.
Those age 50 and older can contribute up to $7,000.
This assumes you have enough earned income to make these contributions.
Earned income is considered wages from a W-2 job or self-employment income.
Your income may limit your contribution limits to IRAs.
This is true for all Roth IRAs based on your modified adjusted gross income (MAGI) and filing status.
The contribution limit may be limited by your income with a traditional IRA only if you or your spouse have access to a workplace retirement plan.
Otherwise, you should be able to contribute up to the limit to a traditional IRA.
Like with 401(k)s, this limit encompasses all IRAs you have of both types.
Taxable brokerage account
Finally, a taxable brokerage account is another option if you’ve maxed out or do not qualify for an IRA.
These accounts have no government-mandated contribution limits.
This allows you to contribute as much money as you’d like and invest in anything your brokerage offers.
Unfortunately, earnings require you to pay taxes as you earn them.
Similarly, you must pay taxes on the sales of assets when you sell them.
Consult an Expert
You may have questions about your particular 401(k) plan and individual contribution limits.
Check with your human resources department or plan administrator to find answers to your specific questions.
Small businesses may not have a human resources department. You may need to check with the general manager or business owner.
If you have questions about your overall investment plan, consider consulting a fee-only fiduciary financial advisor.
They can look at your entire financial picture and give you a complete plan to reach your financial goals.
These advisors are paid directly by you, not commissions, which removes a potential conflict of interest.
Fiduciary advisors must give you advice in your best interests, too, which can help you sleep better at night.