401(k) in 2023: Everything you need to know.

A 401(k) retirement savings plan offers financial advantages to both employers and employees. Employees can build retirement funds with tax benefits, while employers can enjoy tax credits, lower employee churn, and build more engaged workforces.

However, 2023 brings with it a few changes to the 401(k) plan. These may be important to bear in mind, whether you’re already contributing to a 401(k), or deciding on a retirement saving option that meets your needs. 

To help ensure you’re up to date with the contribution and withdrawal rules, New York Life has compiled a guide to the adjustments, for you to consider.

Contributions

401(k) plans are known as “defined contribution” plans. This means the IRS sets a limit on how much an employee can contribute to their plan annually.¹ This limit is regularly reviewed and raised to keep it in line with the rate of inflation. If your employer is matching your contribution, in part or in whole, there is also an overall limit on the combined employee-employer contribution. 

In 2023, the contribution limit for employees in a 401(k) plan is $22,500. The combined total, including employer contributions, is set at a maximum contribution limit of $66,000.²

For savers aged 50 years or older, the limit is even higher, as it includes a “catch-up” contribution of $7,500. This brings the annual contribution limit to $30,000 for employees, and $73,500 when including employer contributions.³

Withdrawals

There has been an increase in the amount of Americans pulling money out of their 401(k) accounts due to financial distress in 2023.⁴ However, this can incur a 10% early withdrawal fee unless you can prove the money is being used for a qualified hardship like medical expenses.⁵ Anybody younger than 59½ years old who wishes to withdraw funds from their traditional 401(k) plan will need to pay this penalty, as well as the usual income tax.

Required minimum distributions 

When you reach a certain age, the IRS requires all 401(k) plan owners to begin regularly withdrawing from their plans. The specified amount is based upon certain criteria, including your life expectancy. Currently, the threshold age to start making mandatory withdrawals is 73 and will rise to 75 in 2033.⁶

Small businesses

Simple 401(k) plans are often offered by small and mid-sized businesses. The 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act, was designed to make it easier for small businesses to offer their employees 401(k) plans by providing tax credits and protections. In 2023, the contribution limit is $15,500; the catch-up amount is set at $3,500.⁷

New York Life is committed to helping every customer successfully navigate their financial futures. Saving for retirement is fundamental to ensuring you, and your family, can comfortably enjoy your later years together.

401(k) plans offer a great way to build retirement funds while benefiting from tax advantages. Life insurance policies also offer future financial protection, and, depending on which policy you purchase, also come with specific tax advantages. 

To find out more about the 401(k) changes in 2023, or to explore our life insurance offerings, connect with a New York Life financial professional today. 

_{[1] Taxpayers should review the 401(k) and IRA limit increases for 2023 | Internal Revenue Service (irs.gov)}

_{[2] Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits | Internal Revenue Service (irs.gov)}

_{[3] 401(k) Contribution Limits for 2023 – Forbes Advisor}

_{[4] Americans are pulling money out of their 401(k) plans at an alarming rate | CNN Business}

_{[5] What's A 401(k) Loan or Hardship Withdrawal? What You Need To Know (cnbc.com)}

_{[6] 3 changes in Secure 2.0 for 401(k), IRA required minimum distributions (cnbc.com)}

_{[7] 401(k) limit increases to $22,500 for 2023, IRA limit rises to $6,500 | Internal Revenue Service (irs.gov)}