Many workers nationwide use employer-sponsored retirement plans to help them stash money away when they’re no longer working. These retirement plans have many benefits, including potential employer matching funds and tax advantages.
These tax advantages are set by the Internal Revenue Service, which specifies how retirement plans are taxed and the contribution limits for each type of plan. Every year, the IRS adjusts these contribution limits based on cost-of-living.
Below, we have outlined the changes to retirement plan contributions for the new year. Read on for your guide to 401k contributions for 2023. Here, you’ll also find tips for employees who want to maximize the benefits of their plans.
Retirement Plan Contribution Limits for 2023
As with every other year, the IRS increased contribution limits for employer-sponsored retirement and other savings plans.
For 2023, the limit for 401(k), 403(b), and almost all 457 retirement plans has increased from $20,500 to $22,500. That sizable 9.76% increase is in line with rising costs due to increased inflation. Also included under those new limits is the Thrift Savings Plan run by the federal government.
In addition to these employer-sponsored plans, the IRS also increased limits for other retirement plans. IRAs, for example, saw their annual contribution limit increase from $6,000 to $6,500 – an 8.33% increase and contribution limits for SIMPLE retirement accounts increased from $14,000 to $15,500 – a 10.71% increase.
Moreover, the annual compensation limit increased by 8.2%, from $305,000 to $330,000. Employers who earn up to that amount annually will qualify for the tax benefits of these retirement accounts, while those who earn more will not.
Employee Tip: Know How Matching Works
Understanding how your employer match works will help you maximize your contributions to your retirement plan. Most employers will set a maximum match percentage. This applies to the percentage of your pre-tax salary you contribute to your retirement plan.
For example, the match might be set at 4%. This means that the employer will match 4% of your salary and put it in your retirement plan, along with the 4% that you contribute. So, for example, earning $1,000 per week means your employer will put $40 in your retirement plan.
Remember, to get that maximum employer contribution, you must contribute at least 4% of your salary (so $40 per week in this case). You can contribute more than that, of course, but your employer will only match up to the maximum.
Another essential aspect to remember is what you must do to qualify. For example, some people who wish to maximize their contribution limits for the year will contribute an extra amount earlier in the year, then dial it back later. Theoretically, this strategy may give them more free money for holiday gifts at the end of the year.
It’s possible, though, that your employer may require you to contribute every week to receive their match. If this is the case, you must ensure that you contribute at least something to your retirement plan each paycheck.
Employee Tip: Set Clear Retirement Goals
Contributing at least the same percentage as your employer match always makes sense. If you don’t, you essentially leave free money on the table. And while most financial experts would suggest saving more than that amount, it depends on your financial situation. Everyone should set retirement, emergency fund, and savings goals to determine the best place to put their money.
Once you’ve contributed at least to your employer match percentage in your 401(k) or other plans, consider your options. Contributing funds above that match percentage to a Roth IRA may make more sense. In that retirement account, you contribute post-tax dollars, but your earnings grow tax-free.
It essentially works the opposite of a 401(k). You’re taxed upfront when you contribute rather than when you withdraw the funds later. But, of course, there are many ways to save for retirement, and maxing out your 401(k) contributions for the year may not make sense for everyone. That’s why it’s essential to set goals and determine what’s best for you based on your income, risk tolerance, and how soon you’ll need to invest your savings.
No matter how you slice it, though, the IRS contribution limits for 401(k) plans and other retirement savings accounts always come into play.
Beckham Insurance Group Has You Covered
We hope you enjoyed this blog on 401k contributions for 2023! No matter how you slice it, the IRS contribution limits for 401(k) plans and other retirement savings accounts always come into play when helping your employees on their journey to financial prosperity.
If you are an employer searching for help in Georgia or South Carolina, reach out to a member of our team at Beckham Insurance Group. Located in Charleston, SC, and St. Simons, GA, we proudly offer complete access to all group health and supplemental insurance markets and products.
Creating a competitive—and compliant—benefits package that meets the needs of your business couldn’t be easier. To get started, contact us today for a free quote. We can’t wait to help you create a healthier and happier workplace!