401(k) Limits Reflect Inflation

The Internal Revenue Code (the "Code") imposes contribution limits on "qualified plans," a term that encompasses 401(k) plans and other less commonly-known retirement plans. The Code also provides a mechanism to adjust for cost-of-living increases. Recently, in Notice 2022-55, the IRS published the 401(k) contribution limits for 2023. For 2023, the contribution limit (for individuals under age 50) for 401(k) plans is $22,500, up from $20,500 for 2022. This $2,000 increase represents a nearly 10% increase, a much higher increase than in recent years; by comparison, the limit increased by a mere $500 from 2019 to 2020, did not increase at all from 2020 to 2021, and increased by $1,000 from 2021 to 2022.

Inflation is at or near a 40-year high, and the increased 401(k) limit signals that the IRS believes that this high level of inflation is likely to continue for the foreseeable future. Increasing the 401(k) limit by slightly more than the rate of inflation allows savers the opportunity to contribute an amount that has at least the same actual value as 2022 contributions.

The increased 401(k) limit obviously comes as welcome news for the millions of Americans who routinely max out their 401(k) contributions. That being said, studies have shown the overwhelming majority of 401(k) participants do not max out their 401(k) contributions, and those who do, tend to make more than the average American. Whether this elevated limit will have a material impact on the savings of the larger population is unclear, but the favorable tax treatment given to qualified plans shows the IRS' commitment to the importance of saving for retirement, even during a time of rising inflation.