The IRS Is Boosting the Maximum Retirement Contribution

By: James Flippin · October 25, 2022 · Reading Time: 3 minutes

Up to the Max

Following adjustments made to tax brackets in 2023, the IRS instituted record-breaking increases to the contribution limits for 401(k) and other tax-deferred retirement plans. Starting next year, individuals can contribute up to $22,500 to their 401(k) or 403(b), as well as most 457 plans and the Thrift Savings Plan eligible to federal workers.

This new maximum contribution will be $2,000 higher next year, representing an increase of 9.8% over the current $20,500 federal contribution limit. The so-called catch-up contribution will also be boosted. This is the amount participants over the age of 50 can save on top of the federal limit. In 2023, the catch-up contribution will increase by 15.4% to $7,500.

The amount individuals can contribute to individual retirement accounts – or IRAs – will also increase, including Roth IRAs, which accept after-tax contributions. IRA contributions will rise 8.3%.

Inflation in Focus

By increasing the amount individuals are permitted to save each year, the IRS hopes to ensure money saved for retirement keeps pace with inflation.

Saving for retirement allows you to take advantage of compound interest. Over time, as you contribute incrementally, your nest egg grows exponentially. Financial advisors note it’s important to make contributions at a young age, so as to give the savings more time to experience compound growth. But research shows many fail to take full advantage of this trend.

Investment management company Vanguard estimates that, within the 401(k) plans it provides to employers, just 14% of participants make the max contribution each year and 16% of those eligible made catch-up contributions.

Supercharge Your Savings

These boosts are the latest in a series of government-led inflation adjustments. Congress sets the formulas that determine the changes using the change in prices over time as a guideline.

For individuals saving for retirement, the higher limits are a great opportunity to grow savings. Increasing monthly contributions by 10% may be hardly felt in the near-term and offset significantly by the very strong benefit gained upon reaching retirement. Inflation may feel challenging now, but these IRS changes could have positive downstream impacts.

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