Knowing the historical 401k contribution limits is important for understanding how much you can really save in your 401k each year.
When most of us think about how much we can contribute to our 401(k), we only think about how much we can contribute as an employee. Instead, think also about how much an employer can contribute to your 401(k) through company profit sharing.
For 2023, an employee can contribute a maximum of $22,500 to their 401(k), up from $20,500 in 2022 and $19,500 in 2021. The 401(k) contribution limit will likely go up by $500 every two years based on history. I really hope everyone maxes out this year and every year for the rest of their working careers.
The employer 401(k) contribution limit, on the other hand, is a hefty $43,500 for 2023. In other words, an employer, through profit sharing or 401(k) matching, can contribute much more than an employee. The total 401k contribution limit in 2023 is, therefore, $66,000.
The next time you look for a new job, make sure to inquire what the employer 401k match or profit sharing plan is. Retirement benefits can really add up over time!
Generous 401(k) Profit Sharing With My Previous Employer
Yes, some of us get paltry company 401(k) matches up to a certain percent of income or up to a particularabsolute dollar limit. But for the most part, we’re left fighting for our own retirement well-being since the pension system isgoing the way of the dinosaur.
The reality is an employer can contribute a heck of a lot more than 3% of your salary or whatever their company match may be. They just need to have the profits and the desire to do so!
After about the fifth year at the firm I retired from, I started receiving “profit sharing.” This was on top of my $5,000 401k company match. I always maxed out my 401kwhile I was there from 2001 – 2012.
During good times, such profit sharing bumped up my overall company 401k match to $25,000 during some years. Ah, those were the good old days.
For those of you who are employed, I suggest familiarizing yourself with your company’s pre-tax retirement savings programs ASAP. You might be leaving free money on the table.
For those of you looking to join a new firm, inquire about their retirement savings program. It could be worth a fortune over time. Let’s look at the historical 401(k) contribution limits over time.
Historical 401k Contribution Limits
The following is a chart I put together on the historical 401k contribution limits. They are the same for those of you with 403b plans, and most 457 plans. The 401k was first enacted into law in 1978, but didn’t gain popularity until around the mid-1980s.
As you can see from the historical 401k contributions limit chart, your employer has the ability to contribute $43,500 to your 401k for a total pre-tax contribution of $66,000 for 2023. Again, the 401(k) contribution limit will likely go up by $500 every year or two.
Great employers tend to also make greatprofits and want to attract and retain the best people. Profit sharing is one of the biggest benefits of working at a blue chip company.
For those of you working at startups, know that you are not only foregoing a higher salary working at an established firm, you’re also foregoing potentially hundreds of thousands of dollars in employer profit sharing as well.
Given most startups are loss-making or barely profitable, many don’t even offerany 401k matching, if they have a 401k plan at all. Therefore, please be fully aware of all your company benefits before making a decision. That equity component best be worth something!
401(k) Income Limits
For 2023, the IRS limits the amount of compensation eligible for 401(k) contributions to $330,000, up from $305,000 in 2022, and up from $290,000 in 2021. The IRS adjusts this limit every year based on changes to the cost of living.
It’s an important distinction that the limit is based on total compensation, which includes employer contributions to a 401(k) plan, and not just salary.
This income limit doesn’t mean anyone making over $330,000 in 2022 is ineligible to contribute. It only means any amount of compensation above the limit isn’t eligible for contribution. You can still max out your 401(k) if you want to.
Employees making more than the limit can still contribute the maximum salary deferral to their employer’s 401(k) plan. However, the employer’s matching contribution will apply only up to the limit.
For example, if you’re paid $500,000 and your employer also offers a 5% match on your 401(k) salary deferrals, you can contribute $22,500 in 2023. Youremployer matchwill only be $16,500, though, or 5% of $330,000 instead of the full $22,500. That’s because your employer 401(k) contribution is limited by the $330,000 compensation limit for 2023. Even though 5% of $500,000 is $25,000, 5% of $330,000 is only $16,500.
Highly Compensated Employees
There are additional contribution restrictions for highly compensated employees as defined by the IRS and your 401(k) plan.
Ahighly compensated employee(HCE) meets at least one of these qualifications:
- They owned more than 5% of the business sponsoring the plan at any point during the past year. This 5% ownership is based on individual holdings, plus those of immediate family members and grandchildren working for the company.
- They make more than the annual compensation limit designated by the IRS. The limit for 2022 is $135,000. The 401(k) plan may also specify that the individual must be in the top 20% of employees when it comes to compensation.
In order for a plan to remain compliant with ERISA, HCEs cannot contribute more than 2% more of their salary than non-HCEs. So if the average non-HCE contributes only 5%, the HCE group cannot contribute more than 7% of their combined salary.
This can make planning contributions extremely difficult since the limit is based on other employees’ contributions and compensation. And, if you don’t make a contribution in the calendar year, you lose the opportunity to do so even though you won’t find out your actual contribution limit until the early part of the next year.
401(k) Savings Potential By Age
The 401k should just be only one leg to a modern day four-legged retirement plan. The other threelegs include: social security, after-taxstock and bond investments, and real estate.
Your estimated social security check should be discounted by 30% because the programis underfunded by 30%. Your after-tax stock and bond portfolio should try to match the amount you accumulate in your 401(k). Finally, it’s a good idea to at least get neutral real estate by owning your primary residence due to inflation.
After listening to more feedback from the community, I’ve updated my 401(k) savings potential by age for the new decade. It’s now broken up into three columns. This is because maximum 401(k) contribution limits were lower in the past. Further, everybody reading this article is a different age.
Older savers are defined as those of you over 45. Middle age savers are defined as those of you between 30 – 45. Younger savers are defined as those of you under 30-years-old.
You can also look at the columns in terms of performance, too. Some of you will inevitably invest better than others. As a result, you may have $2,000,000 in your 401(k) on the high end instead of just $500,000 at age 50. Meanwhile, some of you may work for more generous employers who share more of their profits with you.
The low-to-high end amounts by age should encapsulate 80% of you who’ve consistently maxed out your 401(k) contributions everyyear you’ve been employed. If you want, you can use the table as a guide for your total savings by age.
401(k) Contributions Should Be An Afterthought
Once you’ve decided to max out your 401(k), there’s nothing more you can do except be a loyal employee. You’ve got no control over how much your company contributes. But we can assume there is a correlation betweenthe lengthyou are at your firm andthe amount of benefits you will receive.
There’s a real issuetoday where employees job hop like children afflicted with attention deficit disorder. Can you blame employers for creating a vesting period or delaying their 401k profit sharing until after a certain number of years?
Your goal as a financial freedom seeker is to control what you can control. Actively work to bolster your income to your maximum potential. Then aggressively build an after-tax investment portfolio that spits of gross passive income. This way, you don’t have to wait until you are 59.5 to withdraw money.
Once you have a robust after-tax investment portfolio, you gain the option to retire early. You can also become an entrepreneur or travel the world. In my case, I’ve used my passive income to be a stay at home dad full-time. So far, it’s been a great experience.
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I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time. I attribute my net worth partly due to better money management.
Build Wealth And Earn Income With Real Estate
Contributing to a 401k is a must. However, to retire before 59.5, you must build a steady stream of passive income to live off. Real estate is my favorite asset class to build wealth. It is a tangible asset that is less volatile, provides utility, and generates income.
In 2016, I starteddiversifying into heartland real estateto take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. With interest rates down, the value of cash flow is up. Further, the pandemic has made working from home more common.
Take a look at my two favorite real estate crowdfunding platforms. Both are free to sign up and explore.
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Historical 401(k) Contribution Limits is a Financial Samurai original post. I’ve been helping people financial independence since 2009. Join 60,000+ others and subscribe to my free weekly newsletter.
Comments
Financially Literate saysAdvise needed
My mom is a self-employed personal trainer out of our garage. Her business is an S-corp, earning only about $34,000 a year. My dad is a chef who used to earn about $24,000 a year. They have been renting our house, but our landlord wants to sell the house. We have about 1 year to save up enough before he will sell it to somebody else. My dad took on another two jobs to be able to earn the additional money we need. He currently works 80-90 hours a week! The problem is that killing himself off working three jobs substantially increases our taxes so we still might not be able to afford the house.
What suggestions do you have to reduce our taxes?
Currently, they file their taxes separately. The S-corp has a lot of expenses so my mom pays little taxes. Would filing jointly allow us to transfer some of those expenses to my dad?
(Video) 401(k) Max Contribution Basics 2023: Do You Know How it Works?If you have any questions please ask!
Reply
- Untemplater says
Wow I had no idea the contribution limits were so high in the late 70s – early 80s. That’s impressive! And then they axed them. I don’t have a 401k anymore but I remember how satisfying it was when I first started maxing it out. Now I have a SEP plan that has been working out fairly well and is certainly extremely easy to fund and maintain.
Reply
- ZJ Thorne says
No 401k since I am a long-term temp. I’m planning on setting up a SEP IRA through my business once it becomes profitable, but I am not certain it will be profitable enough to give $54000 in retirement savings a year.
Reply
- Financialbloke says
Tax season is upon us and you really make me want to max out my 401k. My employer matches 4%, so I contribe 4%.
When I’m about to pull the trigger and up my contributions I freeze. I always have in the back of head the thought of other vessels or investments that I could benefit from that liquid cash. Last year I didn’t up my contributions, but instead, I bought an investment property and started investing in peer-to-peer lending.
Do you or anyone else have the same vexing thoughts? Is it a matter of ROI? Diversification?
Reply
- Financial Samurai says
I guess it depends on your income amount. My thought since day 1 was to always max out first and THEN invest all I can in after-tax investments. It’s an especially vexing decision when you’re younger and want to buy a property.
Below are two articles that should help you think through the thought process.
Related:
Should I Contribute To My 401k Or Invest In An After-Tax Brokerage Account?
(Video) What History Teaches Us About 401(k) Contributions Right NowInvest In My 401k Or Save For A Downpayment?
Reply
- ARB says
Man, I’ve gotta stop reading these recommended 401k projections. I’ve got practically nothing in mine. Thank God I spend so little and invest so much of my after tax money.Because I have no idea how my 401k balance is so low.
Having less than $50,000 at my age and making roughly $45,000/year is not the way to go. I’m looking for a higher-paying–not to mention more tolerable and not customer facing–job in finance, but I don’t think that’s going to be enough to undo the damage, especially considering how I’d like to retire early. Better get my side hustles into overdrive.
I really wish the government would remove the limits for 401k contributions. Even though I can’t afford to contribute $18,000, it just feels like sabotage for the government to dictate how much you can save for retirement. Especially when Social Security is so underfunded. It’s like drafting people into the military and then telling them they will have to pay for their own guns.
Sincerely,
ARB–Angry Retail BankerReply
- Financial Samurai says
I’d challenge yourself to try and contribute $18,000 on a $45,000 salary. $18,000 is $1,500 pre-tax contribution a month. Give it a go for 3 months to see how you feel, and whether you can adapt and survive. Make it hurt! I think you’ll surprise yourself at what you can do. When you have little money left over, your HUSTLE MACHINE goes into overdrive.
I’m constantly trying to make myself poor to keep my motivation alive to earn in order to take care of my family.
Reply
- AAB says
The main problem with 401ks is that it cuts into your current income. If you max it out every year indefinitely during your working years you are putting more money into 401k then you will reasonably need for retirement.
Reply
- Financial Samurai says
But the money going into your 401k is then getting invested in assets that should hopefully beat inflation. Most people don’t even bother to invest their savings at all.
(Video) A few reasons to only contribute to get the match in your 401k.Care to elaborate on your comment?
Reply
- AAB says
Not much to elaborate on. I’d rather invest it myself than max out and do a smaller present day investment.
Reply
- Chris says
Sam,
I max out my Roth 401(k), Roth IRA and HSA. Should I be moving either of those first two to the Traditional version?
I am 26, make 90k and will probably aspire to retire early / or at least remove the golden handcuffs, but may have a future spouse who would keep working. Does the math in your opinion always suggest Traditional for both 401(k) and IRA?
Reply
- Kyle says
I have a very similar situation – 27, 90k and am looking forward to early retirement. I’m currently maxing out a 401K, Roth IRA and HSA.
My thinking was that i was diversifying by having a Traditional 401k and a Roth IRA but I’ve read about the advantages of the Roth over Traditional for us early retirement folks. What do you recommend?
Reply
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FAQs
Historical 401(k) Contribution Limits: Employer Profit Sharing Is Significant? ›
As you can see from the historical 401k contributions limit chart, your employer has the ability to contribute $43,500 to your 401k for a total pre-tax contribution of $66,000 for 2023. Again, the 401(k) contribution limit will likely go up by $500 every year or two.
Does profit sharing count towards 401k limit? ›The amount an employee can contribute to a 401(k) plan is limited by the IRC Section 402(g) limit, $20,500 in 2022 (plus $6,500 catch up for eligible employees over age 50). This limit is specific to employee elective deferrals and does not apply to any employer contributions, including profit-sharing contributions.
What is the historic 401k contribution limit? ›Basic elective deferral limit
The basic limit on elective deferrals is $22,500 in 2023, $20,500 in 2022, $19,500 in 2020 and 2021, and $19,000 in 2019, or 100% of the employee's compensation, whichever is less.
401(k) profit sharing enables employers to give employees including owners a discretionary contribution. The profit share contribution is typically 100% tax deductible for the firm, which can help the firm lower taxes versus other profit-sharing options the business may consider.
What are the 401k contribution limits employer match for highly compensated employees? ›Annual 401(k) limits for HCEs
If a 401(k) allows Roth contributions, some or all of these contributions may be made as after-tax Roth contributions. No matter which type of contribution is made, there is one maximum 401(k) limit per person–$22,500 for 2023 (or $30,000 if age 50 or older).
Employers follow a set formula for contributions.
There's no required profit-sharing percentage, but experts recommend staying between 2.5% and 7.5%.
A profit-sharing plan is a retirement plan that gives employees a share in the profits of a company. Under this type of plan, also known as a deferred profit-sharing plan (DPSP), an employee receives a percentage of a company's profits based on its quarterly or annual earnings.
Do employer matches count towards limit? ›One of the biggest perks of a 401(k) plan is that employers have the option to match your contributions to your account up to a certain point. While the IRS places annual contribution limits on 401(k) contributions, employer matches do not count towards that limit.
Can an employer keep your profit sharing? ›Employees do not have to take distributions from profit-sharing plans. If an employee leaves their job, they can take their 401(k) money or leave it in the plan. If an employee leaves their job, they cannot take their profit-sharing money.
What happens if you contribute past Max 401k? ›The bad news. You'll end up paying taxes twice on the amount over the limit if the 401(k) overcontribution isn't paid back to you by the tax-filing deadline, generally around April 15. You'll be taxed first in the year you overcontributed, and again in the year the correction occurs, Appleby says.
What is the difference between 401k and 401k profit sharing? ›
The key difference between a profit sharing plan and a 401(k) plan is that only employers contribute to a profit sharing plan. If employees can also make pre-tax, salary-deferred contributions, then the plan is a 401(k).
How do I know if I am a highly compensated employee? ›- Owned more than 5% of the business at any time during the year or the preceding year, regardless of the amount of compensation received.
- Received more than $135,000 in compensation in the 2022 tax year and was in the company's top 20% in pay.
Highly Compensated Employee - An individual who: Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or.
Can an employer match 100% of 401k contribution? ›Most often, employers match employee contributions up to a percentage of annual income. This limit may be imposed in one of a few different ways. Your employer may elect to match 100% of your contributions up to a percentage of your total compensation or to match a percentage of contributions up to the limit.
What is the 25% rule for profit-sharing? ›If you, the employer, make contributions to a profit sharing plan, you can deduct up to 25 percent of the compensation paid during the taxable year to all participants. Your contributions to the plan can either be fully vested (nonforfeitable) when made, or they can vest over time according to a vesting schedule.
What are the disadvantages of profit-sharing? ›The disadvantage of profit sharing plans is that they are discretionary, meaning employer contributions are not mandatory or guaranteed. The administration costs for a profit sharing plan are also higher than those for standard retirement plans.
What are the 3 types of profit-sharing? ›There are three basic types of profit sharing plans: traditional, age-weighted and new comparability.
What is an example of profit-sharing 401k? ›This is the percent of your salary matched by your employer in the form of a profit share. For example, if you have an annual salary of $25,000 and the employer profit share is 3%, your employer will add another $750 to your 401(k) account. Employer contributions can be subject to a vesting schedule.
Does the 20500 limit include company match? ›Individuals can contribute up to $20,500 to a 401(k) in 2022 and $22,500 in 2023, or $27,000 if they are age 50 or over in 2022 and $30,000 in 2023. An employer match to an employee 401(k) does not count toward the employee's annual contribution limit.
Does the 15 rule include employer match? ›Key takeaways
Fidelity's guideline: Aim to save at least 15% of your pre-tax income each year for retirement, which includes any employer match.
What happens if my employer matches 3 percent? ›
For example, if your employer matches up to 3 percent of your gross income, multiply your gross income by 3 percent (. 03) or the amount of your personal contribution if you contribute less than 3 percent of your own compensation. Pay attention to the maximum amount your employer contributes.
Is profit-sharing the same as employer contribution? ›Despite its name, profit sharing in a 401(k) plan doesn't necessarily involve your company's profits. So what is it? Profit sharing in a 401(k) plan is a pre-tax contribution employers can make to their employees' retirement accounts after the end of the year.
How is the employer profit-sharing calculated? ›To determine each employee's allocation of the employer's contribution, you divide the employee's compensation (employee "comp") by the total comp. You then multiply each employee's fraction by the amount of the employer contribution. Using this method will get you each employee's share of the employer contribution.
Does profit-sharing increase employee retention? ›Profit sharing turns each employee into an entrepreneur, rewarding them for going above and beyond their job description to achieve success. Profit sharing plans improve employee morale, positively impact employee retention and can act as an inducement when searching for new employees.
Why you shouldn't max out 401k early in the year? ›The main reason you may not want to maximize your 401(k) too quickly is that you're most likely getting a matching contribution from your employer that is calculated and funded each pay period. The Vanguard study found that 96% of plans provide employer contributions.
What happens if I max out 401k for 30 years? ›You might be surprised that maxing out a 401(k) for 30 years doesn't provide more in retirement income. There are several reasons for this: Historically, inflation increases faster than IRS contribution limits, meaning your income needs in retirement are growing faster than you can save for them with only a 401(k)
What happens if you max out 401k for 25 years? ›If you have a 401(k), maxing out every year for 25 years will save you over a million dollars. This is based on certain assumptions like a modest 7 percent returns on your 401(k) stocks and bonds.
What is the lookback year for HCE? ›Generally, an employee is an HCE under the ownership test if he or she is a 5% owner at any time during the current plan year (also known as the determination year) or the 12-month period immediately preceding the determination year (also known as the lookback year).
What is the difference between a key employee and a highly compensated employee? ›The terms “key employee” and “highly compensated employee” are sometimes mistakenly interchanged. The main difference is that HCEs earning more than a certain dollar amount in the prior year are not considered key employees unless they meet the ownership or officer2 criteria.
Who is considered an HCE for 2023? ›4 For the 2023 plan year, an employee who earns more than $135,000 in 2022 is an HCE. For the 2024 plan year, an employee who earns more than $150,000 in 2023 is an HCE.
What is the high compensation limit for 401k? ›
The annual limit on compensation that can be taken into account for contributions and deductions increased to $330,000 in 2023 (up from $305,000 in 2022). Compensation doesn't just cover what you get from your employer in the form of a recurring paycheck.
Should I max out 401k if employer doesn't match? ›Even when an employer doesn't match 401(k) contributions, there are still good reasons to contribute the maximum allowed amount in a given year. Contributions to a 401(k) provide tax benefits now, as well as later on. You can also contribute much more to a 401(k) than to an IRA.
Is it worth contributing more than company match to 401k? ›If you have a 401(k) at work and your employer offers a match, you should always invest enough in the 401(k) to claim the full match. If you don't, you're giving up free money. You can't afford to give up free money and should take advantage of the help your employer provides to ensure you save enough for retirement.
Is it worth contributing to 401k without employer match? ›If your employer doesn't offer a match, investing in your 401(k) still has advantages, especially if it has a variety of asset options that match your investing goals. As a tax-advantaged retirement account, you can deduct your contributions from your taxable income.
What counts toward 401k limit? ›The combined contributions of an employee and an employer to a 401(k) account in 2023 is $66,000 or 100% of the employee's compensation, whichever is less. That amount rises to $73,500 if there are catch-up contributions. The employer matching funds do count toward the overall contribution limit.
What are the profit sharing rules for safe harbor 401k? ›The safe harbor profit sharing contribution is a 3% of compensation contribution for each employee who is eligible to defer, whether or not they choose to defer. This contribution will always be 100% vested.
Does profit sharing count as income? ›How Does Profit-Sharing Plan Work? Employers make profit-sharing contributions to the plan on behalf of their employees, and these contributions are not taxable income to the employee. The contributions grow tax-deferred, just like contributions to a 401(k) plan.
What happens if your 401k contributions exceed the limit? ›You'll end up paying taxes twice on the amount over the limit if the 401(k) overcontribution isn't paid back to you by the tax-filing deadline, generally around mid-April. You'll be taxed first in the year you overcontributed, and again in the year the correction occurs, Appleby says.
How do I avoid going over my 401k limit? ›To avoid the penalties on excess contributions, you must withdraw: Excess contributions from your retirement account by the due date of your individual income tax return (including extensions)
What is the difference between safe harbor and profit sharing? ›Profit sharing contribution basics
That means employees do not need to make 401(k) deferrals themselves to receive them. In contrast to safe harbor nonelective contributions, profit sharing contributions are discretionary – which means you don't have to make them every year.
Do employer contributions affect 401k limit? ›
If yours does, you may be left wondering whether those contributions affect how much you can sock away yourself. The short and simple answer is, they don't. Matching contributions made by employers do not count toward your maximum contribution limit.
Do employers contribute to profit-sharing? ›A profit-sharing plan accepts discretionary employer contributions. There is no set amount that the law requires you to contribute. If you can afford to make some amount of contributions to the plan for a particular year, you can do so. Other years, you do not need to make contributions.
Why is profit-sharing taxed so high? ›Why are bonuses are taxed so high? Bonuses are taxed heavily because of what's called "supplemental income." Although all of your earned dollars are equal at tax time, when bonuses are issued, they're considered supplemental income by the IRS and held to a higher withholding rate.