Question on new maximum amounts we can contribute to 401(k)s in 2023

Factual Questions
1

I understand the IRS is bumping the amount you can annually contribute to your 401(k) from $20,000 to $22,500. In addition, for those of us over 50, the catch-up amount will bumped from $6,500 to $7,500. Both of these bump-ups will start in 2023, and will total $30,000 per person that one can contribute to a 401(k).

We currently do the maximum, and the contributions are spaced out over the year. We plan to retire about mid-2023, so any 401(k) contributions we are making will cease then.

My question: can we contribute a much larger amount per paycheck next year, making up for the half-year we won’t be earning? Or does the IRS only want to see a maximum contribution of $XX per paycheck and no more? I’d ask this question of my firm’s HR or accounting department, but I don’t want to tip them off as to my retirement plans quite yet.

2

You can bump the contribution percentage pretty high in most cases. At least 20% in most companies and I think higher. The IRS doesn’t really have a restriction.

From the IRS

The annual additions paid to a participant’s account cannot exceed the lesser of:

  1. 100% of the participant’s compensation, or
  2. $66,000 ($73,500 including catch-up contributions) for 2023; $61,000 ($67,500 including catch-up contributions) for 2022; $58,000 ($64,500 including catch-up contributions) for 2021; and $57,000 ($63,500 including catch-up contributions).
3

I think what you’re asking is if you can front load your contributions and not having them be evenly distributed over every paycheck. The answer is yes unless maybe your employer has restrictions. I retired on May 1st in 2020. That year I put 50% of my paycheck into my 401k until I maxed out.

4

Subject to the restrictions of you company’s plan, yes. Every 401k plan I’ve been in has allowed up to 40% or even 50% deferral.

The IRS limit includes the employer match and is limited to 100% of compensation or $61k.

5

Are you perhaps referring to the limits on “Roth” 401K contributions?

6

I’ve massively front-loaded my contributions for decades. If your monthly pay was huge enough you could hit the Section 415 limits on your first paycheck. I bet lots of executives do just that.

A gotcha is your annual contribution can’t exceed your w2 wages. This also applies to IRAs. Someone who retired real early in the year married to somebody still working to provide cashflow might screw that up.

Don’t ask me how I know.

7

BTW, for those of you who hit the annual maximum, does the payroll system automatically stop contributions once you hit the limit or do you have to change the allocation yourself?

8

It stops automatically. At least the ADP system my companies used did.

9

Why would he be? Contribution limits for tax favorability into a 401k are the same for both Roth and traditional.

10

That has been my experience as well. In years prior to my last year, I’d typically max out in late November or so.

11

The few times I did this it was a nice like-a-bonus to get that extra pay in late November & December.

12

Same story at my employer: You set the contribution rate and they’re responsible for cutting you off at the statutory max. Which will usually not be exactly aligned with your paychecks so one last paycheck will have a short contribution to fill you to the max right to the penny.

I’ve left my percentage-of-pay contribution setting unchanged for years: they start pulling from the first check in Jan & stop when it’s time to stop.

13

Our company uses Fidelity for our SIMPLE IRA’s, which Payroll has to approve for processing each pay period at the Fidelity website. Fidelity won’t allow inputting of over-contributions.

14

The best overall investment strategy would be to frontload it as much as possible for a couple of reasons, you get a few months of extra investment gains (most years) and you don’t get cut off should the job go away for some reason midyear. Most people can’t afford the very meagre paychecks until the max out happens though.

15

Where people sometimes run into trouble is if they change jobs and the new employer doesn’t know you’ve hit the cap. I don’t recall how this is corrected.

16

I didn’t have a 401K - I had a 457(b) ( govt) but the contribution limits are mostly the same. My very last paycheck was for 30 days of unused annual leave - I put all of it in the deferred compensation account. That paycheck was about half of my income for the year since I retired at the end of January but it was under the $22,500 limit.

17

OK, I’m one of those people and I don’t understand - what would my husband still working have to do with my contribution? My contribution can’t be more than the dollar limit and can’t be more than 100% of my eligible compensation but as long as I meet those requirements, I don’t see how my husband working can screw that up.

18

I think he just used the working partner to explain how you could afford to forego the current income, not to mean the partner working was part of the regulations.

19

ETA: Ninja’d by @needscoffee just above.

You retire in January having made a couple thousand in W2 for the whole year.

Then, just as you’ve done every year for the last 20-something years, in the next couple of months you send the maximum IRA contribution of $7,000 each (2022 & before) into your broker for your hubbie’s account and also for your own. Where did you get the cash to write those checks? From his wages.

Oops. You just contributed $7K to your IRA when you only earned $2K. It’s not that hard to fix, once you notice it. And as long as nothing else too complicated happens to your accounts later that same year.

20

But a 401k is administered through work, unlike an IRA, and you can’t contribute more than you’ve been paid through work (and the company does a match, up to some percentage). Or that’s what I’m guessing; I only have experience with IRA and SIMPLE IRA. Maybe I’m misunderstanding your post.