The IRS on Friday announced that contribution limits for 401(k) plans and Individual Retirement Accounts (IRAs) are rising in 2023 in response to price inflation that’s running at the fastest pace in about 40 years.
The boost to the 401(k) maximum is the biggest one ever in both dollar and percentage terms, as retirement investors will be able to contribute $2,000 more in 2023 than they can this year. The limit on so-called “catch-up contributions”– available to those age 50 and over — is rising by $1,000, to $7,500.
That puts 2023’s annual 401(k) limit at $22,500 for workers under 50, and $30,000 for those 50 and older. The same new maximums apply to participants in 403(b) and most 457 plans, as well as the Thrift Savings Plan for federal government employees.
IRA investors will be able to put away an extra $500 in 2023, as the limit rises to $6,500. Unlike most other contribution amounts, the IRA “catch-up” for the 50+ crowd isn’t indexed to inflation and will remain at $1,000.
The income ranges that drive eligibility for deductible contributions to Traditional IRAs and contributions to Roth IRAs are also rising. See the IRS announcement for those and other details.
Of course, higher limits are only useful to the extent Americans can actually find the extra money to put away — at the same time when rising prices for gasoline, energy and food are hammering their cash flow.
It’s not as if Americans are even treading water against inflation — they’re already sinking: August saw revolving credit balances soar by 18%, as Americans continue to pay for inflation with credit cards. “Americans are burning up their plastic in order to make ends meet,” writes SchiffGold’s Michael Maharrey.
Meanwhile, a boost in workplace contribution limits is of limited use when salaries and wages aren’t keeping pace with inflation. In a recent Bankrate survey, only 39% of people who received a raise in the past year or moved to a higher-paying job said the boost had kept up with rising prices.
Only about 14% of 401(k) contributors maxed out in 2021, the Employee Benefits Research Institute’s Craig Copeland tells Bloomberg: “It’s really the people making $100,000 and especially those making $150,000 or more who save the maximum.”
All that said, if you’re among those with the capacity to put away more money for retirement, it could make a differencedown the road.
- Assuming a 5% return, a 40-year-old who boosts his 401(k) contribution by $2,000 a year ends up with roughly an extra $100,000 at age 65. At an 8% return, it’s an extra $159,000.
- For a 50-year old who’s already maxing out and takes advantage of the new limits by increasing 401(k) contributions by $3,000, it yields roughly an extra $67,000 at age 65 at a 5% return, and $87,000 at 8%.
Of course, we realize the more fatalist readers of these pages will be more inclined to invest in food, brass and lead.