When calculating your annual contribution limit to a 401(k) plan, you must consider not only your own contributions but also any matching contributions made by your employer. These employer matches can affect your contribution limit because they are considered “elective deferrals” under the Internal Revenue Code. Elective deferrals include any amounts that you or your employer designate to be contributed to your 401(k) account on a pre-tax basis. The annual limit for elective deferrals is $22,500 for 2023 ($30,000 including catch-up contributions for those age 50 and older). If your employer matches your contributions, the amount of the match will reduce the amount that you can contribute on your own. For example, if your employer matches 50% of your contributions up to 6% of your salary, and you contribute $5,000 to your 401(k), your employer will contribute an additional $2,500. This would mean that you have reached your elective deferral limit for the year, even though you only contributed $5,000 of your own money.
Employer Matching Contributions
Employer matching contributions are a common way for employers to encourage their employees to save for retirement. These contributions are made by the employer on behalf of the employee, and they are typically subject to certain limits.
- Traditional 401(k) Plans: Employer matching contributions count towards the annual contribution limit for traditional 401(k) plans. The annual limit for employee contributions and employer matching contributions combined is $22,500 for 2023 ($26,000 for those age 50 and older).
- Roth 401(k) Plans: Employer matching contributions do not count towards the annual contribution limit for Roth 401(k) plans. The annual limit for employee contributions (including employer matching contributions) to a Roth 401(k) plan is $22,500 for 2023 ($30,000 for those age 50 and older).
It’s important to note that employer matching contributions are taxable income to the employee. This means that the employee will pay taxes on the money when they withdraw it from their 401(k) plan in retirement.
| Contribution Type | Annual Limit |
|---|---|
| Employee Contributions | $22,500 |
| Employer Matching Contributions | $6,000 |
| Total Contributions | $28,500 |
In this example, the employee is contributing $22,500 to their 401(k) plan, and their employer is matching 50% of that contribution, up to a maximum of $6,000. The total contributions to the employee’s 401(k) plan for the year are $28,500, which is below the annual limit of $30,000.
Annual Contribution Limits
The annual contribution limits for 401(k) plans are set by the Internal Revenue Service (IRS) and are adjusted each year for inflation. For 2023, the limits are as follows:
- Employee Elective Deferrals (Pre-tax Contributions): $22,500
- Catch-up Contributions for Employees Age 50 or Older: $7,500
- Employer Matching Contributions: No Limit
- Total Annual Contribution Limit (including employee elective deferrals, employer matching contributions, and catch-up contributions): $66,000
It’s important to note that the employer matching contributions do not count towards the annual contribution limits for employees. This means that employees can contribute up to the annual limit of $22,500 (plus any applicable catch-up contributions) even if their employer is also making matching contributions.
| Contribution Type | 2023 Annual Limit |
|---|---|
| Employee Elective Deferrals (Pre-tax Contributions) | $22,500 |
| Catch-up Contributions for Employees Age 50 or Older | $7,500 |
| Employer Matching Contributions | No Limit |
| Total Annual Contribution Limit | $66,000 |
Pre-Tax vs. Post-Tax Contributions
When you contribute to a 401(k) plan, you can choose to make pre-tax or post-tax contributions. Pre-tax contributions are deducted from your paycheck before taxes are calculated, while post-tax contributions are deducted after taxes.
- Pre-tax contributions reduce your taxable income, which can save you money on taxes now. However, the money you contribute will be taxed when you withdraw it in retirement.
- Post-tax contributions are not deducted from your taxable income, so you will not save any money on taxes now. However, the money you contribute will grow tax-free until you withdraw it in retirement.
Your employer’s 401(k) match is always made as a pre-tax contribution. This means that the match will reduce your taxable income, even if you make post-tax contributions.
The table below summarizes the differences between pre-tax and post-tax contributions:
| Contribution Type | Deductible from Taxable Income | Taxes on Contributions | Taxes on Withdrawals |
|---|---|---|---|
| Pre-tax | Yes | Deferred | Yes |
| Post-tax | No | None | None |
Employer 401(k) Match and Contribution Limits
When contributing to a 401(k) plan, it’s important to understand how your employer’s matching contributions affect your overall contribution limit. Here’s a detailed explanation:
Employee Contribution Limits
- For 2023: $22,500 ($30,000 for those 50 and older)
- For 2024: $23,500 ($31,000 for those 50 and older)
Employer Matching Contributions
- Employer matching contributions are deducted from your paycheck before taxes.
- The combined limit for employee and employer contributions (including matching) is:
- For 2023: $66,000 ($73,500 for those 50 and older)
- For 2024: $69,500 ($76,500 for those 50 and older)
Impact on Contribution Limit
Your employer’s matching contributions do not count towards your employee contribution limit. In other words, you can still contribute up to the employee limit ($22,500/$23,500), even if your employer contributes additional funds as a match.
Roth 401(k) Considerations
Roth 401(k) plans have different contribution limits and rules:
- Employee contribution limits are the same as traditional 401(k) plans.
- Employer matching contributions do not affect your employee contribution limit.
- However, there are income limits that determine who is eligible to contribute to a Roth 401(k) plan.
| Contribution Limit | Traditional 401(k) | Roth 401(k) |
|---|---|---|
| Employee | $22,500/$23,500 | $22,500/$23,500 |
| Employer Match | Not included in limit | Not included in limit |
| Combined Limit | $66,000/$69,500 | Not applicable |
Well, there you have it, folks! Now you know all about how your employer’s 401k match affects your annual contribution limit. Remember, it’s important to take advantage of your employer’s match, as it’s free money that can help you reach your retirement goals faster. So, if you’re not already contributing to your 401k, now’s the time to start. And if you have any more questions, be sure to visit us again soon. We’re always happy to help!