401(k) contribution limits increased for 2023. Check your contributions and review your long-term tax strategy.
What are the 2023 401(k) contribution limits?
In 2023, you can contribute up to $22,500 to your 401(k). If you’re age 50 or older, you get an additional $7,500 catchup contribution that takes you to $30,000 total.
In 2022, the limits were $20,500 for all ages and an extra $6,500 ($27,000 total).
The limits are for both your Traditional 401(k) and Roth 401(k) contributions. These limits only apply to employee contributions.
Any employer 401(k) matching contributions don’t count towards your personal 401(k) contribution limit.
Your 401(k) contribution limits are also separate from your IRA contribution limits.
Check your 401(k) contributions.
Everyone should check their 401(k) contributions each year.
One thing to be aware of if you like to max out your 401(k) is whether you contribute a fixed dollar amount or a percent of your paycheck.
If you divided last year’s limit of $20,500 by 26 to get $788.46 per paycheck, make sure to bump that up.
If you calculated that you needed to contribute 15% of each paycheck to max out your 401(k), check your math based on your current salary and the new limits.
Caution: Some employers match by paycheck not by year. If you max out early and don’t contribute for the rest of the year, you might get no match for the rest of the year.
Example: You get 6% per paycheck. You contribute 30% of your pay for the first six months to max out your 401(k). You get a 6% match for those six months but then 0% for the last three months. That takes you down to an average of 3%.
Revisit your Roth 401(k) decision.
If your employer offers a Roth 401(k), think about whether and how much you want to use it.
Already using a Roth 401(k)? Maybe with more money going into your 401(k), you don’t want to put in as much after-tax money.
Not using a Roth 401(k)? Maybe you want to use the contribution increase to start. That way you have more options for managing your taxes in retirement.
More tax deductions aren’t always better.
While it may sound hard to believe, getting the biggest tax deduction now isn’t always the best move.
First, if you’re planning to buy a house in the future, you might need to build up cash savings in addition to retirement savings. If you have to take money out of your 401(k) for a down payment, you’ll owe taxes plus a 10% penalty.
Second, a 401(k) can mean having a high taxable income in retirement. You may have Social Security income, pension income, or taxable brokerage account investment income.
401(k) withdrawals in retirement are taxable (unless you used a Roth 401(k)). Starting at age 72, you’re required to take Required Minimum Distributions each year.
It’s possible that you could end up with your retirement income being in a higher tax bracket than you are currently. So do the math and see if maxing out your deductible 401(k) is the right move or if you should choose other options.