401k Limits: Everything You Need to Know
The 401k limit is the maximum amount of pre-taxed payroll that an employee can invest into his or her 401k account on an annual basis.6 min read updated on January 01, 2024
The 401k limit is the maximum amount of pre-taxed payroll that an employee can invest into his or her 401k account on an annual basis. The 401k plan is the most popular type of retirement savings account in the United States. The 401k limit can be adjusted on an annual basis, and is set by the Internal Revenue Service (IRS). The 401k rules force employers to determine the most appropriate investments for its employees in terms of 401k investing.
Savers Credit Eligibility
The savers credit provides additional tax benefits to those with very little income wishing to have funds transferred into a 401k account.
If you fall into one of the below categories, you will be eligible for the savers credit, which provide a 50 percent credit of all contributions made for the taxable year:
- Married/filing joint with up to $37,000 yearly adjusted gross income
- Head of household with a yearly adjusted gross income of up to $27,750
- All other taxpayers with an adjusted gross income of up to $18,500
If you fit one of the following criteria, then you will be eligible for a credit of 20 percent:
- Married/filing joint with between $37,001-$40,000 adjusted gross income
- Head of household with adjusted gross income of $27,751-$30,000
- All other taxpayers with an adjusted gross income of $18,501-$20,000
A credit of 10 percent will be provided for any one of the following:
- Married/filing joint with between $40,000-$61,500 adjusted gross income
- Head of household with adjusted gross income of $30,000-$46,125
- All other taxpayers with an adjusted gross income of $20,000-$30,750
Tips to Maximize Your 401k
One clear way to maximize your 401k is to contribute the maximum amount allowed under the IRS rules. However, this may not be possible for many of us who have other financial obligations. One way to slowly increase your retirement savings is to increase the contributions by 1% every year until you reach a level you are happy with. Another option you have is to increase the rate whenever you receive a raise. You may also want to see if there is another type of savings vehicle aside from a 401k that will help you increase your retirement savings.
What Are the Employee Contributions to Retirement Plans?
There are four different contributions that can be made to retirement accounts, including Elective Deferral Contributions, Designated Roth Contributions, After-Tax Contributions and Catch Up Contributions. The elective deferral limit is the amount that employees can contribute on an annual basis; the total contribution limit is the overall contribution amount that can be put into a 401k, inclusive of both the employee and employer’s contributions.
Elective Deferral Contributions
Also referred to as salary reduction contribution, elective deferral contributions are the most common type of contributions made to retirement plans. Employees choose to have funds deducted from their salary each pay period, which will go directly to their retirement account. Since the money goes directly into the account, the funds aren’t taxed, which means that you will have less tax withheld each pay period. Note that there is an annual limit of how much you can contribute to your retirement account.
Designed Roth Contributions
A designed Roth contribution, while similar to an elective deferral, is unique as the amount being deferred is in fact taxed. Employees can choose to contribute either a percentage or specified amount of their salary each pay period to the account. While the funds are taxed, certain qualified distributions are in fact non-taxable.
These are usually non-Roth contributions made in addition to a regular elective deferral of salary. If your specific plan allow for after-tax contributions, such contributions must be included in your taxable income, and cannot be deducted on your tax return.
Many retirement plans allow catch-up contributions. If you are 50 or older by the end of the year, you might have the ability to make additional, nontaxable deferrals beyond the usual limit. This type of contribution is beneficial for those who haven’t contributed much to their retirement plan in the past and want to ensure additional savings for retirement.
What Kinds of Contributions Can Employers Make to Retirement Plans?
Matching Contributions and Discretionary Contributions. While some retirement plans require employers to contribute, other plans provide that such contributions are at the sole discretion of the employer. It is important to note that there is generally a vesting period, meaning that the employee must be employed with the company for a certain number of years before they are eligible to keep the employer-sponsored funds in the retirement account.
Matching Contributions. Some employers will match the contributions of its employees $1 for $1. However, keep in mind that there is always a vesting period in which employees must remain at the company for a specified period of time before they can keep the money that the employer contributed to the account. Other employers will contribute 50 cents for every $1 contributed thereby contributing 50 percent of what the employee puts into the account. Matching contribution are non-taxable.
Discretionary Contributions. These contributions also referred to as non-elective contribution, provide that employers can contribute to their employees 401k if they choose to do so. The amount contributed must be equal for every employee, and cannot be made to only some employees. These contributions are also non-taxable.
In 2017, the limit is $18,000 with an additional $6,000 catch-up contributions for those 50 years of age or older. The overall 401k contributions limits, including elective deferrals, employer matching contributions, non-elective employee contributions, and any other allocations of forfeiture, is $54,000, with an additional $6,000 for those 50 years of age and older. Therefore, for those in this age category, the limits are $24,000 and $60,000 respectively.
One-person 401k Contribution Limits
Those who are self-employers can either participate in a solo or individual 401k, which means that they are considered the employer and employee for contribution purposes. The same elective deferral limit of $18,000 on the employee side, with the additional $6,000 amount as noted above. The employer contribution can be up to 25% of your compensation, depending on how much you make. However, keep in mind that regardless of how much income you earn, the overall limit remains $54,000 or $60,000 (as referenced above for those 50 years of age and older). Therefore, if you make $320,000, 25 percent of this amount would be $80,000, which is above the threshold.
Roth 401k Contribution Limits
Roth 401k contribution limits are the same as the traditional limits-- $18,000. If you choose to contribute to both, make sure that you know how much to contribute to each one and the benefits of each.
403(b) Contribution Limit
403(b) contribution limits are almost identical to the 401k limits. 403(b) plans have some unique provisions for catch-up contributions. If your plan allow, eligible employees with at least 15 years of service can potentially ad up to $3,000 in additional elective deferrals on an annual basis, even if they have not reached the age of 50. Once the employee reaches age 50, however, the additional $6,000 applies.
457(b) Contribution Limits
457(b) plans also have identical elective deferral limits; not every state and local government offer such plans. These plans may also have a catch-up provision that provides for employees within three years of retirement to contribute up to twice the annual limit of $18,000.
Difference Between Traditional and Roth IRA Benefits
- Traditional IRAs may be tax-deductible depending on your income; however, once you do withdrawal funds from your traditional IRA, the money will be treated as taxable income.
- Roth IRA contributions are already taxed before being put into the account. Therefore, you wont get a current-year tax deduction, but your withdrawals will be 100 percent tax-free.
- IRAs allow you to invest in any stock, bond, or mutual fund while your 401k account limits you to a much smaller number of investments.
- IRAs provide you with additional investment choices so you’ll want to compare those IRA offerings with that of the 401k offerings.
- Roth IRAs can allow you to lock in your current tax rate
- IRA accounts allow your investments to grow and compound on a tax-deferred basis, meaning that won’t be required to pay taxes on capital gains each year.
- Roth contributions can be withdrawn with no penalty at any time since the funds were already taxed.
- Roth IRAs don’t have a required minimum distribution unlike 401k and traditional IRA accounts.
- You can contribute to a Roth regardless of your age and income.
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