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Is there a reason why the contribution limits of these are drastically different with the 401k limits being about three times higher?

Moreover, why is it that the 401k limits go up over the years but those of the IRA were stagnant for 3 consecutive years?

The basic limit on elective deferrals is $22,500 in 2023, $20,500 in 2022, $19,500 in 2020 and 2021, and $19,000 in 2019, or 100% of the employee's compensation, whichever is less. IRS

How much can I contribute to an IRA? The annual contribution limit for 2023 is $6,500, or $7,500 if you're age 50 or older (2019, 2020, 2021, and 2022 is $6,000, or $7,000 if you're age 50 or older). IRS

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  • From a personal finance perspective, the limits (both income and contribution) are different because the law/IRS says so. The answer below explains that. If you want to know why the laws/IRS make them different, that is more of a politics question than personal finance. There's already a question there about why have 401(k) at all, but nothing I see about why have the particular limits for IRA/401(k)
    – yoozer8
    Commented Feb 12, 2023 at 4:35

1 Answer 1

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Congress passes the tax laws and the presidents signs them. For many years the IRA was stuck at $2,000 because congress didn't allow it to grow with inflation. That means that for many decades the annual limits for the 401(k) has been higher.

Congress decided when they allowed the amount to be indexed that the increase had to be in round numbers. For the 401(k) and IRA it has to be in $500 increments. So if the inflation is low enough there is no step increase.

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