max for 401k contribution
max for 401k contribution
max for 401k contribution 401(k) plans are an excellent way to save for retirement, but because 401(k)s are tax-advantaged, the IRS sets a contribution limit on how much you — and your employer — can put into your 401(k) per year.
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- The maximum you can put into a 401(k) in 2022
- If you’re under age 50, your maximum 401(k) contribution is $20,500 in 2022.
If you’re 50 or older, your maximum 401(k) contribution is $27,000 in 2022, because you’re allowed $6,500 in catch-up contributions.
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For 2022, your total 401(k) contributions — from yourself and your employer — cannot exceed $61,000 or 100% of your compensation, whichever is less.
Employers who match employees’ 401(k) contributions often do so between 3% and 6% of the employee’s salary. So if you make $50,000, and contribute 5% of your salary ($2,500), and your employer matches that full 5%, you’ll add $5,000 to your balance each year.
Can I contribute 100% of my salary to my 401(k)?
It depends on what your salary is. The maximum individuals under 50 can contribute is $20,500 in 2022. The limit for those 50 or older is $27,000 in 2022.
Are there separate limits for Roth 401(k)s?
No. Roth 401(k)s have the same contribution limit as regular 401(k)s. For 2022, that limit is $20,500. You can contribute to both a traditional 401(k) and a Roth 401(k) account in the same year, as long as your total contributions don’t exceed that amount. If you’re choosing between the two,
Are there income limits for 401(k)s?
While there’s not a universal income limit on 401(k) contributions, in some cases the IRS does impose contribution limits on “highly compensated employees” when a company encounters disproportionate contribution levels among its workers. The IRS has a test that helps employers who sponsor 401(k) plans assess whether employees are participating in their plan at levels proportionate to their compensation.
If the test determines that people across compensation levels aren’t participating in a manner the IRS deems proportionate, employee contribution levels for highly compensated employees can be lowered. In these cases, your employer may need to return some of your excess contributions.
The IRS defines a highly compensated employee in one of two ways:
- An individual who either owned more than 5% of the interest in a business at any time during the year or the preceding year, no matter how much they were paid.
- An individual who received over $135,000 from the business in the preceding year in 2022, and, if the employer ranks employees by compensation, was in the top 20%.
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Can I have a 401(k) and an IRA?
Yes. IRAs make a great supplement to retirement savings in addition to a 401(k) if you’re contributing enough to receive a full match from your employer, or you’re planning on maxing out your 401(k). If you don’t receive a match on your 401(k) or it has narrow investment options or high fees, it may be a good idea to invest primarily in an IRA. The annual contribution limit for an IRA in 2021 and 2022 is $6,000, or $7,000 if you’re 50 or older.
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What happens if I exceed my 401(k) limit by mistake?
If you contribute too much to your 401(k) and notice your mistake before the tax filing deadline, you can probably correct it with your employer. You’ll need to notify your plan administrator. They’ll return the excess money to you, and you’ll get a new W-2 and pay taxes on your new total taxable wages.
If you don’t catch the mistake before tax day, you may have to pay taxes twice on the amount you contributed over the limit. That’s because the excess contribution can’t be deducted from your taxes in the year it was made, and because the IRS will still count that money as taxable when it’s distributed too.
401(k) contribution limits for 2021 and 2022
When most people think of 401(k) contribution limits, they are thinking of the elective deferral limit, which is $19,500 in 2021 and $20,500 for 2022. This is the maximum amount you are allowed to voluntarily defer to your 401(k) for the year. Adults 50 and older are also allowed $6,500 in catch-up contributions, which are additional elective deferrals, in 2021 and 2022. This brings the maximum amount they can contribute to their 401(k)s to $26,000 in 2021 or $27,000 in 2022.
The IRS also imposes a limit on all 401(k) contributions made during the year. In 2021, it rises to $58,000 and $64,500, respectively. In 2022, it rises to $61,000 and $67,500, respectively. This includes all your personal contributions and any money your employer contributes to your 401(k) on your behalf.
Highly paid employees have some additional limitations to keep in mind. Companies can elect to stop a participant’s salary deferrals once that person has earned $290,000 in 2021 or $305,000 in 2022, and companies use only that first amount to calculate employer matching contributions.
For example, say your company matches up to 6% of your salary and you earn $300,000 in 2021. Six percent of $300,000 is $18,000; however, your company can only match you up to 6% of $290,000, the maximum employee compensation limit for 2021. So rather than up to $18,000, you’d get up to $17,400 as an employer match.
You may face additional limitations if you’re a highly compensated employee (HCE) or a key employee. These are employees who own 5% or more of their company, own at least 1% of their company and earn $130,000 or more.
Here’s a useful reference chart to help you remember these important limits and thresholds:
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TYPE OF CONTRIBUTION 2021 TAX YEAR 2022 TAX YEAR
Elective deferrals $19,500 $20,500
Catch-up contribution $6,500 $6,500
Maximum elective contribution limit $26,000 $27,000
Maximum contribution limit (under 50) $58,000 $61,000
Maximum contribution limit (50 and older) $64,500 $67,500
Employee compensation limit for calculating contributions $290,000 $305,000
Employer contribution limits
Some employers match a portion of their employees’ 401(k) contributions as an additional incentive. These contributions do not count against your elective deferral limit, but they do count against your maximum annual contribution limit. So if you’re under 50 and you contribute the maximum $20,500 to your 401(k) in 2022, your employer is able to contribute a maximum of $40,500 on your behalf.
Matching contributions are the most common type of employer contribution. This means your employer contributes a percentage of your income based on how much you’ve contributed yourself. For example, it might match $0.50 on the dollar up to 6% of your income, or it might give you a dollar-for-dollar match up to 3% of your income. Every plan has its own rules and restrictions, so you must talk with your employer to learn about how its matching system works.
Companies can also make nonelective contributions, whereby they add funds to employees’ 401(k)s regardless of whether the employee contributes money themselves. These are less common, but some companies offer them instead of or in addition to matching contributions. Nonelective contributions also count against your maximum annual contribution limit.
