When you have a 401(k), you are required to follow the regulations that put a cap of the number of funds that can be transferred into an account each year. These caps are called contribution limits. These limits depend on many factors, such as your age when you contribute funds, the type of 401(k) plan you have, and if you or your employer make contributions into the account. To make sure that you say compliant with regulations, you will need to know the contribution limits for your 401(k) account.
If you take the time to learn about the contribution limits of your 401(k) plan, you will be able to plan your contributions in advance. While it is common for employers to have different amounts that they contribute to a 401(k), there is an IRS regulation that all 401(k) account owners and employers must follow.
How Contribution Limits Work
First, you should know that contribution limits for 401(k) accounts are subject to change every year, and they often increase. For 2018, the contribution limits for employees on a traditional, safe harbor, or Roth 401(k) is $18,500 per year. In 2017, the contribution limit was $18,000. It is essential that you know that if you have more than one 401(k) plan that all of your accounts together cannot exceed $18,500. Therefore, it is crucial that you know the yearly changes so that you never miss the chance to add more money to your account if you are financially able. The more money that you have in your account, the more benefits you will receive. You may also end up retiring with more money than you might have originally planned.
When you hear the term “contribution limits” you should know that it includes all of your optional income deferrals, which is the portion that you take out of your paycheck and place into your retirement account. If you have a Roth account within your 401(k), contribution limits also include any after-tax contributions. You should know that if you have other retirement accounts set up, like an IRA, that payments to any non-401(k) accounts do not affect your contribution limit.
Catch-Up Contribution Limits
When you have a 401(k) account, your contribution limit changes once you turn 50. Limits change as an incentive for those account holders who are getting closer to their retirement age to contribute more funds into their account before they quit working. When you reach 50, you can make additional contributions after you reach the standard contribution limit, which means that you can contribute $6,000 more to your account after you reach your contribution maximum for the year. Therefore, for 2018, the maximum annual contributions that you can make if you are 50 or older is $24,500. By increasing the limit, you can contribute to what is called a “catch-up” contribution, because it allows you to catch up on contributions if you feel you need more funds in your retirement account before you quit working.
If you have a SIMPLE 401(k) plan, you will need to know that the contribution limit is lower than the limits placed on other 401(k) plans. Therefore, the employee contribution limit in 2018 is $12,500, and the catch-up contribution limit is $3,000 if you are 50 or older.
Limits for Highly Compensated Employees
If you have a high-income salary, you may be considered a “highly compensated employee” (HCE). HCE’s face stricter regulations regarding contribution limits since wealthy 401(k) participants can end up receiving an imbalanced amount of tax deferral benefits. To prevent this from occurring, HCE’s are subject to Actual Deferral Percentage (ADP) testing, which is used by the IRS to ensure that tax benefits provided are proportional to all income levels. Meaning, that wealthy employees receive almost the same tax benefits as low-income employees. Also, the contribution amount may be limited for HCE’s if there is low participation in the 401(k) by low-income employees.
Employer Contribution Limits
A big incentive for opening a 401(k) account is that you may benefit from employer contributions. If your employer participates in employer contributions, they may contribute a specific amount of money into your retirement account. Typically, employer contributions match a percentage of what you put into your account, and most employers match around 50 percent of your contributions up to a specific amount. While the amount that your employer matches are up to the company, there is a limit on the total amount that an employer can contribute to your 401(k) account. For 2018, the annual employer contribution limit is $36,500. The annual limit does not include any funds that you contribute to your account. To learn about employer contribution limits and when you can start receiving contributions from your employer, you can speak with your Human Resources (HR) representative, or whoever manages your 401(k) plan.
Total Contribution Limits
When you have a 401(k) account, you are encouraged to participate and contribute funds into your account to prepare you for your retirement years. However, you must do so while following all regulated limits. For 2018, the contribution limit is $55,000 or 100 percent of your yearly compensation, whichever is the lesser amount. It is crucial that you know that this contribution limit includes both employer matching, employee salary deferrals, and after-tax Roth 401(k) contributions.
It is critical that you know that the total contribution limit does not include the catch-up contribution that you can add if you are 50 or older. Meaning, that for a traditional, safe harbor, or Roth plan, your contribution limits is $61,000. When factoring into the amount of funds that you are going to contribute to your retirement account, you must remember to stay up-to-date on the contribution limits for the year, as they are known to change yearly. When you know the yearly limit, you can contribute the maximum amount without having to worry about going over the limit, which can allow you to take advantage of employee matching, if applicable.