The Internal Revenue Service announced today that young workers will be allowed to contribute up to $22,500 pretax to a 401(k) or similar retirement savings plan in 2023, a $2,000 jump from the current $20,500 limit.
The new $22,500 and $30,000 limits apply to employee contributions that are made either pre-tax or to a Roth account in a 401 plan, or to similar plans maintained by non-profit and government employers—403 plans, most 457 plans and the federal government’s Thrift Savings Plan for workers.
It works like this: Pre-tax contributions reduce your current tax bill and grow tax deferred, but all your withdrawals in retirement are taxable . Roth contributions are made after tax and all earnings on them are tax free when taken out in retirement. Earnings on after-tax contributions are merely tax deferred and only the original contributions come out tax free.
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