When determining your 401(k) contribution limit, it’s important to consider whether your employer will match your contributions. These matching contributions count towards the annual limit of $22,500. For example, if you contribute $10,000 to your 401(k) and your employer matches $5,000, the total contribution towards the limit is $15,000. It’s essential to be aware of this as it can impact your 401(k) planning and ensure you maximize your contributions within the allowable limit.
Annual Contribution Limit
The annual contribution limit for 401(k) plans is set by the Internal Revenue Service (IRS) and applies to both employee and employer contributions combined. This limit is reviewed and adjusted each year by the IRS based on economic factors, and for 2023, it is as follows:
- Employee contributions: $22,500 (plus a catch-up contribution limit of $7,500 for individuals aged 50 or older by the end of the calendar year)
- Employer contributions: $66,000 (plus a catch-up contribution limit of $7,500 for certain highly compensated employees)
It’s important to note that these limits are applied to the total amount of contributions made to all of your 401(k) plans combined, regardless of the number of employers you have.
Employer Matching Contributions
Many employers offer matching contributions to their employees’ 401(k) plans. These contributions are made by the employer directly into the employee’s account, typically as a percentage of the employee’s salary or contributions. Employer matching contributions can significantly increase your retirement savings over time.
Does Employer Match Count Towards 401(k) Limit?
The answer is no, employer matching contributions do not count towards the annual 401(k) contribution limit for employees.
This means that the full amount of your employer’s matching contributions can be made in addition to the maximum amount that you can contribute on your own.
Example
To illustrate, consider the following example:
| Employee Contributions | Employer Matching Contributions | Total Contributions |
|---|---|---|
| $22,500 | $10,000 | $32,500 |
In this example, the employee contributes the maximum allowable amount of $22,500 to their 401(k) plan. Their employer matches 50% of the employee’s contributions, resulting in an additional $10,000 of matching contributions. The total amount of contributions made to the employee’s 401(k) plan is $32,500, which is below the annual contribution limit of $66,000.
Employee Deferrals
Employee deferrals are the contributions you make to your 401(k) plan from your paycheck. These deferrals are not included in the 401(k) limit, so they do not reduce the amount of money you can contribute to your 401(k) plan.
For example, let’s say you have a 401(k) plan with a limit of $20,500 per year. You decide to contribute $10,000 to your 401(k) plan from your paycheck. Your employer matches your contribution dollar-for-dollar, up to a maximum of $5,000 per year. In this case, your total 401(k) contribution for the year would be $15,000 ($10,000 from your paycheck + $5,000 from your employer’s match).
401(k) Contribution Limit
| Contribution | Limit |
|---|---|
| Employee Deferrals | $22,500 |
| Catch-Up Contributions (for those age 50 and up) | $7,500 |
| Employer Matching Contributions | 100% of employee deferrals, up to 25% of employee compensation |
Employer Matching Contributions
Many employers offer matching contributions to their employees’ 401(k) plans. This means that the employer will contribute a certain amount of money to the employee’s account for every dollar that the employee contributes, up to a certain limit.
Employer matching contributions can be a great way to save for retirement, as they can help you to increase your savings faster. However, it is important to understand how employer matching contributions work before you decide how much to contribute to your 401(k) plan.
- Contribution limits: The amount that you can contribute to your 401(k) plan is limited by the IRS. For 2023, the limit is $22,500 (plus an additional $7,500 catch-up contribution for those who are age 50 or older).
- Matching contribution limits: The amount that your employer can contribute to your 401(k) plan is also limited by the IRS. For 2023, the limit is 100% of your compensation, up to a maximum of $66,000 (plus an additional $11,000 catch-up contribution for those who are age 50 or older). Note, however, that the $66,000 limit includes both employee contributions and employer matching contributions, so the actual amount that your employer can contribute will depend on how much you contribute.
The following table shows how employer matching contributions count towards the 401(k) limit:
| Employee Contribution | Employer Matching Contribution | Total Contribution |
|---|---|---|
| $10,000 | $5,000 | $15,000 |
| $20,000 | $10,000 | $30,000 |
| $30,000 | $15,000 | $45,000 |
As you can see, the employer matching contribution counts towards the overall 401(k) limit. This means that you can reach the limit faster if you take advantage of your employer’s matching contribution.
Tips for maximizing your employer matching contribution:
- Contribute enough to your 401(k) plan to receive the full employer matching contribution.
- If your employer offers a Roth 401(k) option, consider contributing to that instead of a traditional 401(k). Roth 401(k) contributions are made with after-tax dollars, but they grow tax-free and can be withdrawn tax-free in retirement.
- If you are age 50 or older, you can make catch-up contributions to your 401(k) plan. Catch-up contributions are not subject to the annual contribution limit, but they are subject to the overall 401(k) limit.
Employer Matching Contributions and 401(k) Limits
401(k) plans are employer-sponsored retirement savings plans that allow employees to save for retirement on a pre-tax basis. Employers may also choose to contribute to their employees’ 401(k) plans. These employer matching contributions can help employees save more for retirement, but they can also affect the total amount that an employee can contribute to their 401(k) plan each year.
Contribution Limits
The annual contribution limit for 401(k) plans is $22,500 in 2023. This limit includes both employee contributions and employer matching contributions. However, employer matching contributions do not count toward the employee’s annual contribution limit. This means that an employee can contribute up to the annual limit of $22,500, regardless of how much their employer contributes.
Catch-Up Contributions
Employees who are age 50 or older can make additional catch-up contributions to their 401(k) plans. The catch-up contribution limit is $7,500 in 2023. Catch-up contributions are not subject to the annual contribution limit, so employees can contribute up to $30,000 to their 401(k) plans in 2023 ($22,500 + $7,500).
Example
Here is an example of how employer matching contributions can affect an employee’s 401(k) contribution limit:
- Employee A contributes $10,000 to their 401(k) plan.
- Employer A matches 50% of Employee A’s contribution, up to a maximum of $5,000.
- Employer A contributes $5,000 to Employee A’s 401(k) plan.
- Employee A’s total 401(k) contribution for the year is $15,000 ($10,000 + $5,000).
In this example, Employee A’s employer matching contribution of $5,000 does not count toward Employee A’s annual contribution limit of $22,500. This means that Employee A can still contribute up to $7,500 more to their 401(k) plan for the year.
Conclusion
Employer matching contributions can be a valuable way for employees to save more for retirement. However, it is important to understand how employer matching contributions affect the annual 401(k) contribution limit. By understanding these rules, employees can make sure that they are maximizing their retirement savings.
Additional Resources
- IRS 401(k) and Profit-Sharing Plan Contribution Limits
- Fidelity 401(k) Contribution Limits
- Vanguard Understanding Contribution Limits: 401(k) and IRA
And that’s a wrap! We hope this quick guide has cleared up any confusion surrounding whether your employer’s matching contributions count toward the 401(k) limit. If you have any further questions or concerns, don’t hesitate to reach out to your plan administrator or a financial advisor. Thanks for reading, and be sure to stop by again for more money-related tips and insights!