The IRS wants to encourage you to save for retirement, but there are limits to it. Regardless of the type of retirement account you choose, the fastest way to increase your savings is to contribute as much as possible each year.
401(k) Contribution Limits
The 401(k) account is probably the most well-known retirement account. Many employers offer these plans that are funded by work and match a certain percentage of employee contributions. For example, if an employer matches up to 4% of contributions, it allows the employee to save 8% of each paycheck for half of the actual cost.
Contributions to a 401(k) account are typically made before taxes are deducted from your salary, so you will pay taxes later when you withdraw that money in retirement.
Contribution limits for 2022: $20,500
Contribution limits for 2023: $22,500
If you wish to contribute after taxes, your account will be a Roth 401(k). Since you have already paid income taxes on the contributions, you will not have to pay taxes when you withdraw the money in retirement.
If you are self-employed and have no employees other than your spouse, you can set up an individual 401(k) account for yourself, sometimes referred to as a Solo 401(k). You have the option to contribute pre-tax dollars (traditional) or after-tax dollars (Roth) to the individual 401(k) account.
IRA Contribution Limits
There are four main types of Individual Retirement Accounts (IRAs): traditional, Roth, SIMPLE, and SEP.
Permissible contribution limits for 2022: $6,000
Permissible contribution limits for 2023: $6,500
Traditional retirement is funded with pre-tax dollars, while Roth retirement is funded with after-tax dollars. You are allowed to contribute up to $6,000 in 2022 to your traditional and Roth accounts, and up to $6,500 in 2023. For those who have both types of accounts, contribution limits apply to the total annual contributions to both accounts. If you are age 50 or older, you can contribute an additional $1,000 above those limits.
IRA contributions are tax-deductible up to the contribution limits for most taxpayers, unless the taxpayer (or their spouse) is covered by an employer-sponsored retirement plan. If the taxpayer (or their spouse) is covered, the deductions begin to phase out at certain incomes until they completely stop, depending on the filing status:
Contribution Limits for SEP and SIMPLE IRA
You can set up traditional or Roth IRA accounts yourself, but only an employer can set up a SEP-IRA for you. SEP stands for “Simplified Employee Pension.” SEP-IRA accounts are typically used by self-employed individuals or small business owners. Contributions made by the employer to a SEP-IRA cannot exceed 25% of employee wages or $61,000 in 2022 and $63,000 in 2023.
SIMPLE IRA accounts are designed for small businesses with 100 employees or fewer. SIMPLE stands for “Savings Incentive Match Plan for Employees,” and contributions are made with pre-tax dollars. The permissible contribution limit for 2022 is $14,000, increasing to $15,500 in 2023. Those aged 50 or older can contribute an additional $3,000 in 2022 and $3,500 in 2023.
Frequently Asked Questions
Are IRA contributions like 401(k) contributions?
Individual Retirement Accounts (IRAs) and 401(k) accounts are similar in many ways. The main difference is that a 401(k) is funded by the employer, who may also match the employee’s contributions to the account. Both provide tax-advantaged ways to save for retirement and a variety of investment options for those contributions.
Is…
Can I contribute to both a SEP-IRA and a traditional IRA?
Yes, you can contribute to both a SEP-IRA (or any employer-sponsored retirement plan) and your traditional IRA (or Roth). You should be aware that there will be contribution limits that may be tax-deductible for your IRA based on your income.
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Sources:
U.S. Internal Revenue Service
Source: https://www.thebalancemoney.com/how-much-can-i-put-into-my-retirement-account-453788
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