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Contributing to a qualified retirement account can save you money on taxes while getting you closer to your long-term financial goals. To reap those tax benefits, you'll need to observe contribution, income and deduction limits set by the IRS. Contribution limits for employer-based 401(k) accounts are higher than for traditional and Roth individual retirement accounts (IRAs): $22,500 vs. $6,500, respectively, for 2023—and there are additional restrictions to be mindful of as well. Here are the contribution and income limits for 2023.
401(k) Contribution Limits
Contributing to an employer-based 401(k) or 403(b) retirement plan reduces the amount of wages reported on your tax return, thus lowering your taxable income. For 2023, these elective contributions are limited to $22,500. Workers who are 50 and older can make an additional $7,500 in catch-up contributions. Many employers also match employee retirement contributions, either dollar for dollar or partially. Your total contribution including employer-matching funds cannot exceed $66,000—or $73,500 for workers 50-plus.
IRA Contribution Limits
Individual IRA and Roth IRA accounts offer another way to save for retirement. Your total contributions to traditional or Roth IRAs are limited to $6,500 in 2023—a $500 increase from 2022. Taxpayers who are 50 and older can make an additional $1,000 catch-up contribution. Your IRA contribution should be made using earned income; to that end, your contribution cannot exceed your taxable compensation for the year. For example, if you earned $3,500 in 2022, your maximum IRA contribution would be $3,500.
Married couples filing jointly can each make the maximum contribution to an IRA as long as their combined income exceeds the amount they're contributing, even if one spouse doesn't meet the income requirement.
IRA contribution limits apply to money you put into traditional and Roth IRAs combined. You can split your total contribution between these two types of accounts, but you can't contribute $6,500 to each.
IRA Deduction Limits
If you participate in a retirement plan at work, such as a 401(k), your IRA deduction may be limited based on your income. Although you can contribute $6,500 (or $7,500 if you're 50 or older) to a traditional IRA regardless of how much you make, you may not be able to deduct your contribution on your taxes if your income exceeds IRA thresholds.
For taxpayers who participate in employer-based retirement plans, here are traditional IRA deduction limits for 2023 based on your modified adjusted gross income.
| Traditional IRA Deduction Limits by Income for 2023 | |||
|---|---|---|---|
| Full Deduction | Partial Deduction | No Deduction | |
| Single or head of household | Up to $73,000 | More than $73,000 but less than $83,000 | $83,000 and up |
| Married, filing jointly | Up to $116,000 | More than $116,000 but less than $136,000 | $136,000 and up |
| Married, filing jointly, only one spouse covered by a 401(k) | Up to $218,000 | More than $218,000 but less than $228,000 | $228,000 and up |
| Married, filing separately | Not applicable | Less than $10,000 | $10,000 and up |
Source: IRS; limits are for IRA participants who also have a workplace retirement plan
Roth IRA Income Limits
While you can't take a tax deduction on a Roth IRA because contributions are made after-tax, Roth IRAs have income limits as well: They indicate how much you can contribute to a Roth, if at all, and they apply whether or not you participate in a 401(k). The Roth IRA contribution limit for 2023 is $6,500. Income limits, which are based on modified adjusted gross income, are as follows:
| Roth IRA Income Limits for 2023 | |||
|---|---|---|---|
| Full Contribution | Partial Contribution | No Contribution | |
| Married, filing jointly | Less than $218,000 | $218,000 to $228,000 | $228,000 and up |
| Married, filing separately and lived with spouse during the year | Not applicable | Less than $10,000 | $10,000 and up |
| Single, head of household, or married filing separately and did not live with spouse during the year | Less than $138,000 | $138,000 to $153,000 | $153,000 and up |
Source: IRS
Want to calculate your reduced contribution? See IRS Publication 590-A, Contributions to Individual Retirement Accounts (IRAs) for a worksheet to figure it out.
What to Do if You Contribute Too Much to an IRA or 401(k)
Contributing too much money to your IRA or 401(k) plan could lead to additional tax. Excess contributions and any interest or gains they earn are taxed at 6% per year for each year the money remains in your retirement account. This tax cannot exceed 6% of the combined value of your IRA accounts at the end of the year.
How to Avoid Paying Tax on Excess Contributions
You can avoid paying the 6% tax by withdrawing excess contributions, along with any earnings they've generated, before the due date for individual tax returns. For contributions made in 2022, that deadline is April 18, 2023. Be aware: To receive these funds by the April 18 deadline, you should ideally request them a month or more in advance.
Contact your 401(k) plan administrator to request a corrective distribution that includes the excess money you contributed and the interest or appreciation you earned on it. They should issue an amended W-2 with your distributed funds added to your wages for the year. If you overcontributed to an IRA, follow the same steps with your financial institution. You should receive Form 1099-R, which shows what you made on your excess contribution so you can add it to your taxable income.
What if You Miss the Deadline?
If you don't remove your excess contributions before the tax filing deadline, you'll pay a 6% tax on that money. And since the 6% tax applies for each year the money remains in your account, you'll likely pay twice—once for the prior year and again for the current one. Make the corrective withdrawal as soon as possible to avoid paying another 6% when a new year begins.
Maxing Out Your Retirement Contribution
Maxing out your retirement contribution is good financial advice, but it does require you to understand contribution limits so you don't under- or over-fund your accounts. As long as you meet IRS guidelines, contributing to a 401(k) plan, traditional IRA or Roth IRA can offer you tax advantages that will help your nest egg grow.