Let’s talk about 401k contribution limits. There’s plenty of them!
No doubt 401k plans are wonderful tools to help build wealth for retirement purposes, and it’s important to take full advantage of the tax breaks they allow. There are, however, limits to the amount that you and your employer can contribute each year.
That’s right. Uncle Sam isn’t that generous! They do want some of “their” money from you now, not later.
Congress has made strides to increase these 401k contribution limits over time to keep up with the pace of inflation and allow people to save more for retirement. After all, people are needing more money to retire than they used to simply because things cost more now. These changes to the limits are also called COLA’s-or, Cost of Living Adjustments. So every few years, if not every year, these limits are adjusted to take the increase in the cost of living into consideration.
It’s important to note that the IRS isn’t the only group who may limit the amount you can contribute to your 401k.
That’s right. Your employer may also have limitations on how much you can contribute – usually set as a percentage of compensation. So it’s possible that your employer may set you at a limit lower than what the IRS allows. Check with them to see what their 401k contribution limits are, if any.
There are many types of 401k contribution limits.
There is a limit to how much you, as the employee, can contribute to your 401k. This is also known as the 402g limit (you can exceed this limit by making catch-up contributions if you are over age 50). There’s a limit to how much you and your employer combined can contribute, which is known as the 415c limit. There’s also a limit on how much of your total gross compensation can be taken into consideration when determining your contributions. This is known as the annual limit on compensation.
These limits can also be applied uniquely to different groups of people (for example, highly compensated employees). This isn’t to say that some groups of people get to contribute more than others. In fact, the whole purpose of the 401k (and retirement plans in general) is that the rules are supposed to be fair and equitable to everyone. So this means the CEO of a company cannot contribute more to the company’s 401k plan than a recent graduate in an entry level position of the same company (well, the CEO will be able to contribute more because they make more, but not because the limits are different for each person…make sense?).
Furthermore, employers are required to test their plans each year to ensure that everyone is being treated fairly and that no one has exceeded any 401k contribution limits. This yearly testing is called non-discrimination testing (NDT) and is generally mandatory for most plans.
You can also go to the IRS website to get information on 401k contribution limits as well.