IRS Boosts 401(k) Contribution Limit by Record Amount Amid Raging Inflation

The IRS building in Washington on Feb. 19, 2014. (Jim Watson/AFP/Getty Images)

The IRS announced on Oct. 21 that it would raise the amount that Americans can contribute to 401(k) and similar retirement saving plans by a record 9.8 percent amid decades-high inflation.

Starting in 2023, Americans can contribute as much as $22,500 into 401(k), 403(b), the federal government’s Thrift Savings Plan, and most 457 retirement plans, according to the IRS’s announcement. That’s $2,000 more than the current contribution limit of $20,500, it said.

In November 2021, the IRS raised the contribution limit by $1,000 for 2022 to the current $20,500, up from $19,500 for 2021 and 2020.

Meanwhile, the IRS raised the limit on annual contributions to an IRA from $6,000 to $6,500 in 2023. The IRA catch‑up contribution limit for individuals aged 50 and above won’t be subject to the annual cost‑of‑living adjustment and remains at $1,000, the IRS said in a statement.

“Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year, either the taxpayer or the taxpayer’s spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income.”

Meanwhile, benefits provider Milliman told The Wall Street Journal that the $2,000 spike in the 401(k) contribution limit is the largest increase ever in terms of the dollar amount and percentage.

Other Changes

In a separate announcement, the IRS confirmed there will be higher federal income tax brackets and standard deductions for next year. Each of the 2022 tax brackets’ income ranges increased by around 7 percent, as compared with last year’s figures, the IRS (pdf) stated.

For the tax year 2023, the top marginal rate, or the highest tax rate based on income, remains 37 percent for individual single taxpayers with incomes greater than $578,125, or $693,750 for married couples filing jointly. The lowest rate is 10 percent and applies to single individuals with incomes of $11,000 or less and married couples earning $22,000 or less.

The other rates are: 35 percent for incomes over $231,250 (or $462,500 for married couples filing jointly), 32 percent for incomes over $182,100 (or $364,200 for married couples filing jointly), 24 percent for incomes over $95,375 (or $190,750 for married couples filing jointly), 22 percent for incomes over $44,725 (or $89,450 for married couples filing jointly), and 12 percent for incomes over $11,000 ($22,000 for married couples filing jointly).

The Social Security Administration said on Oct. 13 that Social Security retirement payments will increase by an average of more than $140 per month on average. According to the announcement, its cost-of-living adjustment, or COLA, will increase by 8.7 percent starting with payments that will be sent out in January 2023.

The 8.7 percent increase is the highest yearly COLA since the early 1980s, analysts have said.

The increases come after the Department of Labor released data showing the Consumer Price Index, a key inflation measurement, increased 8.2 percent year-over-year. That’s running near 40-year highs.

Katabella Roberts contributed to this report.