For most American taxpayers, the 401(k) is potentially the largest tax break available. Not only can you deduct your contributions, but many employers add on a matching contribution to boost your retirement savings even further.
One big advantage of the 401(k) is that contribution limits tend to be high. Indeed, that’s truer than ever in 2023, with retirement savers seeing a big boost in the 2023 401(k) contribution limits.
How much 401(k) contribution limits are going up
Taxpayers are getting a larger tax break in 2023 for their 401(k) contributions. Contribution limits for those who will be younger than 50 at the end of 2023 will be $22,500, up by $2,000 from the 2022 limit.
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In addition, older workers qualify for an additional catch-up contribution that lets them put even more money into a 401(k) plan. The catch-up for 2023 is going up by $1,000 to $7,500. When you add that onto the $22,500 baseline for all taxpayers, the result is that those who will be 50 or older by the end of next year will be able to set aside up to $30,000 in a 401(k) — $3,500 more than in 2022 — and get all the tax benefits that come with those contributions.
Exactly what those tax benefits are depends on the type of 401(k) your employer offers. Most people use regular 401(k) contributions, which allow you to take money that would otherwise be included in your taxable income and instead direct it to the tax-favored retirement account. Some also have access to Roth 401(k)s, which don’t give you that immediate tax break but come with the added bonus of allowing you to make withdrawals of your contribution and the earnings it generates on a tax-free basis in retirement.
Be aware of these limits if you also want to use IRAs
The 401(k) limits are high enough to cover most of the savings needs of many taxpayers. However, you might also choose to open an IRA to cover some of your retirement savings — particularly if you want access to a Roth-style account but don’t have a Roth 401(k) option in your workplace plan. Even though the IRA contribution limits are smaller, the accounts often give you more flexibility in choosing investment options.
However, those who are eligible for 401(k) plans might not be able to deduct all of their traditional IRA contributions. The income limits that apply depend on whether you’re the one with 401(k) coverage or whether your spouse has access to a 401(k). If you have your own 401(k), here are the limits that can eliminate your traditional IRA deduction in some cases:
For this filing status:
Deductions are reduced if income is above this amount
Deductions are not available if income exceeds this amount
Single, head of household, or married filing separately IF you didn’t live with your spouse during the year
$73,000
$83,000
Married filing jointly or qualifying widow or widower
$116,000
$136,000
Married filing separately IF you lived with your spouse at any point during the year
$0
$10,000
Data source: IRS.
Meanwhile, if your spouse has a 401(k), these income limits apply:
For this filing status:
Deductions are reduced if income is above this amount
Deductions are not available if income exceeds this amount
Married filing jointly
$218,000
$228,000
Married filing separately IF you lived with your spouse at any point during the year
$0
$10,000
Data source: IRS.
To be clear, these limits don’t affect your ability to deduct your 401(k) contributions — only your IRA contributions. In addition, separate income limits apply to Roth IRAs, but they’re in effect regardless of whether you have a 401(k) plan at work or not.
Be smart with your 401(k)
With the 2023 401(k) contribution limits higher than ever, it makes sense to start using your employer plan to the fullest. That way, you’ll put yourself in the best possible position to retire comfortably on your terms.
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