Intro
Saving enough for retirement is a top concern for many people today. With Americans living longer and healthcare costs rising, relying solely on Social Security often won’t be enough to maintain your standard of living.
Making the most of 401k plans and IRAs is key to building your retirement funds. Understanding the contribution limits and strategies for these accounts can max out your retirement savings.
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401k and IRA Contribution Limits
2023 401k Contribution Limits
For 2023, the maximum employee contribution limit for 401k plans is $22,500, up from $20,500 in 2022. This limit applies to both traditional and Roth 401k contributions.
If you are age 50 or older, you can also make an additional $7,500 “catch-up” contribution, for a total of $30,000.
The total combined maximum contribution limit from employees and employers for 401k plans in 2023 is $66,000, up from $61,000 in 2022.
This includes both employee pre-tax and Roth contributions, employer matching and non-elective contributions, and employee after-tax contributions.
Those over age 50 can contribute an additional $7,500 catch-up for a total of $73,500.
IRA Contribution Limits for 2023
The contribution limit for traditional and Roth IRAs also increased for 2023. The maximum you can contribute is $6,500, up from $6,000 in 2022.
If you are age 50 or older, you can contribute an extra $1,000 for a total of $7,500.
Unlike 401k plans which are sponsored by employers, you can open and contribute to an IRA on your own as an individual.
IRAs also have income limits that can reduce or eliminate your ability to deduct contributions if your income exceeds certain thresholds.
Max Out Your Retirement Savings
IRA Annual Contribution Restrictions
The IRS sets limits on how much you can contribute to IRAs each year.
Here are the IRA contribution limits for 2023:
- IRA Contribution Limit – $6,500, up from $6,000 in 2023
- IRA Catch-Up Contribution – $1,000 if age 50 or over, same as 2023
- Total IRA Contribution Limit if Over 50 – $7,500
Unlike workplace plans, anyone can contribute to an IRA if they have earned income, subject to these annual limits based on your age.
What Contributions Don’t Count Toward the Limit?
Certain IRA contributions don’t count toward your annual contribution limits:
- Rollovers from Employer Plans – Rolling over a 401k or other workplace plan does not apply to your limit.
- IRA Transfers – Moving funds between IRAs does not count as a contribution.
- Returning Excess Contributions – Removing excess contributions does not count.
This allows you the flexibility to move existing retirement funds without impacting your annual contribution amounts.
Consequences of Excess IRA Contributions
Contributing over the annual IRA contribution limits results in excess contributions, which incur penalties until corrected:
- 6% Tax Penalty – Excess amounts are subject to a 6% penalty tax each year they remain in the account.
- Earnings Also Penalized – The penalty tax also applies to any earnings related to the excess contribution.
- Multiple Options to Fix – You can withdraw the excess, re-characterize it, or apply it to a future year before filing your tax return to avoid issues.
Being aware of the rules for excess contributions enables you to quickly address any mistakes to avoid further penalties.
Correcting Mistaken 401(k) Over Contributions
As with IRAs, contributing over the 401(k) plan limits leads to tax headaches:
- 401(k) Contribution Limit – $22,500 in 2023 plus $7,500 catch-up contributions if 50 or older
- Refund After Tax Filing – You can request a refund of the excess deferrals and earnings after filing taxes.
- 401(k) Match May be Forfeited – Any matching contributions associated with the excess amounts may be forfeited.
- 10% Early Withdrawal Penalty – If not corrected, excess 401(k) contributions are subject to a 10% penalty if withdrawn before age 59 1/2.
Consult your plan administrator as soon as excess 401(k) contributions are identified to begin correcting them on time.
Getting the Most Out of Your 401k
To maximize your 401k savings, here are some tips:
- Contribute at least enough to get any employer match – Many employers offer matching contributions up to a certain percentage of your salary. This is essentially free money, so contribute enough to get the full match.
- Increase your contribution rate annually – Boost your 401k contribution rate by 1-2% each year to work towards maxing it out. Going from 6% to 7% may not seem like much, but it can add up significantly over time.
- Contribute any bonus or tax refund – Consider putting some or all of your bonus or tax refund towards your 401k to turbocharge your savings.
- Make catch-up contributions if 50+ – Take advantage of the $7,500 catch-up if you are age 50 or over to supercharge your 401k heading into your peak retirement savings years.
Maxing Out Your IRA
To get the most out of your IRA:
- Contribute the max each year – Putting in the annual limit of $6,500, or $7,500 if over 50, will better position your IRA to help fund your retirement.
- Consider both traditional and Roth IRAs – Depending on your income, tax situation, and goals you may want to contribute to one or both types of IRAs.
- Use an IRA if over the income limit for deductible 401k contributions – If your income exceeds the limits to deduct pre-tax 401k contributions, you can contribute to a non-deductible traditional IRA and then convert it to a Roth IRA to get money into the Roth.
- Contribute early in the year – Try to fund your IRA as early in the year as possible so the money is invested and you have more time for potential growth.
Rollover Options to Consolidate Retirement Funds
In addition to direct contributions, you may have other retirement accounts from previous employers or other sources.
Consolidating these by rolling them over into your IRA or current 401k plan can provide benefits:
- Simplifies your retirement portfolio into fewer accounts to manage
- Allows greater control over investment selections in your IRA
- Provides the ability to convert funds to Roth accounts
- May provide access to lower-cost institutional fund share classes
Some common accounts you can roll over include:
- 401k, 403b, 457 from previous employer
- Traditional IRA or SEP IRA
- Pension plan distributions
Be aware of any fees or penalties for transfers out of existing accounts. Also, consider the impact on creditor protection, required minimum distributions, and distribution flexibility.
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Contribution Alternatives for Retirement Accounts
There are several ways you can add money to your 401k and IRA retirement accounts:
- 401k Salary Deferrals – Contribute directly from your paycheck pre-tax or as Roth contributions up to annual limits
- Employer Matching – Many employers will match a % of your 401k contributions
- Profit Sharing & Non-Elective Contributions – Your employer may add profit sharing or other non-elective contributions to your 401k
- IRA Contributions – Fund your Traditional or Roth IRA accounts up to annual limits
- Rollovers from Old Accounts – Consolidate by rolling over 401ks, IRAs, and pensions from previous employers
- Catch-Up Contributions – Once over 50, you can add extra catch-up amounts to 401k & IRA
Understanding your options allows you to take full advantage of building your retirement savings through contributions.
Additional Strategies to Boost Retirement Savings
Beyond basic contributions, here are some other strategies to ramp up your retirement funds:
- Mega backdoor Roth IRA – If your 401k plan allows after-tax contributions, you may be able to make non-Roth after-tax contributions and convert them to a Roth IRA. This can help bypass IRS income limits on direct Roth contributions.
- 72(t) Substantially Equal Periodic Payments – Withdrawals prior to age 59 1/2 typically incur a 10% early withdrawal penalty. However, the 72(t) rule allows you to avoid this if you take substantially equal periodic payments from your retirement account.
- Low-cost index investing – Stick to broad stock and bond index funds and ETFs to minimize investment fees which can significantly erode long-term returns.
- Maximize employer stock options – If you have the opportunity to purchase employer stock at a discount through stock options or an employee stock purchase plan (ESPP), take full advantage of this.
- Retirement account asset location – Place high turnover actively managed investments in retirement accounts to avoid capital gain taxes. Hold broad index funds in taxable accounts to benefit from lower long-term capital gain tax rates.
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Other Ways to Accelerate Retirement Account Growth
In addition to direct contributions, here are other strategies to max out your retirement savings:
- 401(k) Mega Backdoor Roth – If the plan allows, make after-tax contributions then convert to a Roth IRA to bypass income limits.
- 401(k) In-Service Withdrawals – Some plans permit withdrawals while still employed after age 59 1/2.
- 72(t) Substantially Equal Payments – Avoid early withdrawal penalties with calculated distributions using this rule.
- Low-Cost Index Fund Investing – Reduce investment fees that can significantly decrease long-term returns.
Key Takeaways to Maximize Retirement Contributions
Optimizing contributions across your 401(k), IRA, and other accounts is key to pursuing your retirement goals:
- Know the annual contribution limits and use catch-up amounts at 50+.
- Correct any excess contributions before year end to avoid penalties.
- Consolidate old 401(k)s and IRAs by rolling over.
- Use strategies like mega backdoor Roth and low-cost indexing.
- Meet with a Financial Advisor to develop a comprehensive plan.
Save Aggressively For Your Retirement Goals
Maximizing your 401k and IRA contributions takes planning and discipline, but can pay off tremendously down the road.
Aim to save at least 15% of your income for retirement including any employer contributions. Take advantage of catch-up contributions at 50.
Consider meeting with a Financial Advisor to develop a comprehensive retirement strategy.
Use these 2023 401k and IRA contribution limits as an opportunity to supercharge your retirement readiness.
Frequently Asked Questions
Q: What are the income limits for deducting IRA contributions?
A: If your income exceeds certain thresholds, you may not be able to deduct some or all of your traditional IRA contributions. For 2023, the phase-out range for deducting contributions is $73,000 to $83,000 for single filers and $116,000 to $136,000 for married couples filing jointly.
Q: Can I contribute to both a 401k and IRA?
A: Yes, you can contribute to both a 401k and an IRA in the same year. The contribution limits are separate for each account type.
Q: What happens if I contribute too much to my 401k or IRA?
A: If you overcontribute, you will typically need to withdraw the excess amount plus any earnings. You may also owe a 6% tax penalty on the excess amount unless you qualify for an exemption.
Q: When is the deadline to make IRA contributions for a tax year?
A: You can contribute to your IRA for a given tax year any time up to the tax filing deadline, generally April 15 of the following year.
Q: Can I roll over money from other retirement accounts into my IRA?
A: Yes, you can roll over eligible distributions from 401k, 403b, 457, and other workplace retirement plans into an IRA. This can help max out your retirement savings.
