401k Contribution Limits

A 401(k) is a company-sponsored defined contribution account that allows you to save a portion of your paycheck for retirement. 401(k)s are tax-deferred, which means you can take advantage of immediate tax deductions on the full amount of your contribution. However, future withdrawals of Traditional 401(k)s upon retirement are taxed at your ordinary income rate. 

You may assume that because it’s your money and your future retirement, you should be able to contribute however much you want — when you want. That might be the case in a perfect world, but in reality, the government limits how much you can contribute to your 401(k) every year because of the special tax benefits these retirement accounts provide. We’ll cover the 401(k) contribution limits this year and throw in a few historical tidbits so you can make the best decisions about your 401(k) every year.

How Much Can You Contribute to Your 401(k)?

The IRS sets 401(k) contribution limits each year. The contribution limit typically increases annually or every few years to account for inflation. In years of higher inflation rates, these limits usually go up more compared to years with more manageable inflation rates. If you’re over 50, you can also make additional catch-up contributions. 

What Are the 401(k) Contribution Limits? 

The 401(k) contribution limits for 2023 have increased from 2022. You can contribute up to $22,500 to a 401(k) in 2022, In comparison, the annual contribution limit to a traditional individual retirement account (IRA) — a tax-deferred retirement savings account — is $23,000 in 2023. Here’s a table that shows how much the contribution limit has changed since 2007.

Limits for Employer Match Benefits 

Your employer may match your 401(k) contributions up to a certain amount every month. The most common partial match employers provide is 50% of your salary, up to 6% of what you put in. This means that your employer will match half of whatever you contribute but no more than 3% of your salary. 

You have to put in 6% to get your employer’s maximum match. Let’s say you put in 10% — your employer will still only put in 3%. Note: Your company may express how the match is offered in a few different ways — but these all mean the same thing:

• 50 cents on the dollar up to 6%
• 50% on the first 6%
• 3% on 6%

However, there are varying methods for calculating employer match, and percentage match varies by employer. You can speak with your company's HR department to understand employer match opportunities. The 401(k) contribution limit does not include whatever percentage your employer is willing to match. This means that if your employer offers to match your contributions, your yearly contribution could exceed the standard $22,500 limit. 

401(k) Limits for High-Earning Employees 

Highly compensated employees must abide by different rules and regulations that define how much they can contribute. The IRS defines a highly compensated employee (HCE) as one who either makes more than $125,000 a year and is in the top 20% of compensated employees or owns at least 5% of the company.

HCEs cannot contribute more than 2% above the average amount a lower-compensated employee contributes within the company. For example, if the average lower-compensated employee contributes 3%, the max an HCE can contribute is 5%. 

These rules and regulations are protected by yearly nondiscrimination tests the IRS runs. If the HCE contributes more than 2%, the excess amount may be refunded to the individual at the end of the year as taxable income. These guidelines are in place to protect 401(k) plans from favoring HCEs. 

What are 401(k) Catch-Up Contributions? 

You can make catch-up contributions to your 401(k) if you’re over 50. It’s designed to help people nearing retirement make extra contributions. These additional contribution limits can also change yearly, like the standard 401(k) contribution limit. The limit in 2023 for this type of contribution is $7,500, which means you can reach an annual 401(k) limit of $30,000.

Summary of Contribution Limits

Here are the various contribution limits and thresholds, including the employee contribution limit and catch-up contribution limits.

Should You Contribute the Maximum to Your 401(k)?

How much you contribute to your 401(k) depends on your income, lifestyle and contribution ability. Sure, you’re going to hit your retirement goals faster if you contribute the maximum, but you may want to take other things into consideration — even if you have the money to max out your account.

Here are some questions to ask yourself first: 

1. Are you putting money into other important accounts like an emergency fund? 
2. Do you have credit card debt or other forms of debt?
3. Do you have the right insurance policies — like health insurance and life insurance? 

In other words, you might not want to sacrifice other aspects of your life and wealth to max out your 401(k).

Contribute to the Limit (or not!)

Generally, contributing as much as possible to a 401(k) can help you stabilize your income in retirement and plan for your future. Be sure to max out any employer match contributions. Otherwise, you'll leave cash on the table. 

Wondering if your company offers a match? First, visit your company’s human resources department to find out more about what the company offers. Your next stop might be with a reputable financial adviser to determine a plan for your 401(k), other retirement savings and future goals. Taken together, you can create a plan that secures your retirement and helps you create new financial opportunities.

Frequently Asked Questions