The 401(k) contribution limit refers to the maximum amount of money that employees can contribute to their 401(k) retirement accounts each year. The IRS sets these limits annually, and contributions to a 401(k) are tax-deferred, meaning they reduce taxable income in the year they are made and are not taxed until withdrawn in retirement.
For the tax year 2023, the contribution limit is:
- $22,500 for individuals under age 50.
- $30,000 for individuals aged 50 and older (including a $7,500 catch-up contribution for those nearing retirement).
Contributing to a 401(k) provides several tax advantages:
- Tax-deferred growth: Investments within the 401(k) grow tax-free until withdrawn, allowing the account to compound more efficiently.
- Employer matching contributions: Many employers match a portion of the employee’s contributions, effectively increasing retirement savings without additional cost to the employee.
Taxpayers who can maximize their 401(k) contributions not only reduce their current tax liability but also build a larger retirement fund for the future. It’s important to monitor contribution limits each year, as exceeding them can result in penalties or require corrective distributions.