Understanding 401k contribution limits is crucial for maximizing your retirement savings and taking full advantage of potential tax benefits. This guide breaks down the different limits and rules you need to know to make informed decisions about your 401k contributions.
401k Contribution Limits: Two Key Numbers
When it comes to contributing to a 401k, there are two primary annual limits to keep in mind:
- Employee Elective Deferral Limit: This is the maximum amount an employee can contribute from their salary to specific retirement plans.
- Overall Contribution Limit: This encompasses all contributions to a participant’s account, including employee deferrals, employer matching, and any other employer contributions.
Employee Elective Deferral Limits
The employee elective deferral limit applies to the following types of retirement plans:
- 401(k) plans
- 403(b) plans
- SARSEP IRA plans (Salary Reduction Simplified Employee Pension Plans)
- SIMPLE IRA plans (Savings Incentive Match Plans for Employees)
Deferral Limits for Traditional and Safe Harbor 401(k) Plans:
| Year | Limit |
|---|---|
| 2024 | $23,000 |
| 2023 | $22,500 |
| 2022 | $20,500 |
| 2021 | $19,500 |
| 2020 | $19,500 |
| 2019 | $19,000 |
If you participate in multiple plans, you’ll need to aggregate all elective deferrals to ensure you don’t exceed these limits. Exceeding the limit requires corrective action.
Deferral Limits for a SIMPLE 401(k) Plan:
| Year | Limit |
|---|---|
| 2024 | $16,000 |
| 2023 | $15,500 |
| 2022 | $14,000 |
| 2021 & 2020 | $13,500 |
| 2019 | $13,000 |
These amounts may be adjusted in future years to account for the cost of living.
Plan-Based Restrictions
Keep in mind that your specific 401k plan may impose lower limits on elective deferrals. Additionally, if you’re a manager, owner, or highly compensated employee, your plan might need to restrict your deferrals to pass non-discrimination tests, ensuring fairness across all employees.
Catch-Up Contributions for Those Age 50 and Over
If your 401k plan allows it, participants aged 50 or older can make catch-up contributions, exceeding the standard deferral limits. This provides an opportunity to further boost retirement savings as you approach retirement.
Catch-Up Contribution Limits for Traditional and Safe Harbor 401(k) Plans:
| Year | Limit |
|---|---|
| 2023 & 2024 | $7,500 |
| 2022, 2021 & 2020 | $6,500 |
| 2019 – 2015 | $6,000 |
Catch-Up Contribution Limits for SIMPLE 401(k) Plans:
| Year | Limit |
|---|---|
| 2023 & 2024 | $3,500 |
| 2022 – 2015 | $3,000 |
You don’t need to be “behind” on your contributions to be eligible for catch-up contributions.
Catch-Ups for Participants in Plans of Unrelated Employers
If you participate in 401k plans from multiple, unrelated employers, you can treat amounts as catch-up contributions even if the individual plans don’t explicitly permit them. However, it’s crucial to monitor your deferrals to ensure you don’t exceed the overall applicable limits.
Example: Joe Saver, over 50, has two 401(k) plans through unrelated employers. Even if neither plan has catch-up provisions, he can defer a total of $26,000 in 2020 (the $19,500 regular limit plus the $6,500 catch-up limit). He is responsible for monitoring his contributions and ensuring he doesn’t exceed $19,500 under either plan.
Contact your plan administrator to determine if your plan allows catch-up contributions and how the rules apply to your specific situation.
What Happens with Excess Deferrals?
An excess deferral occurs when your total elective deferrals to all plans exceed the annual limit. If this happens, notify your plan administrator before April 15th of the following year. You’ll want the excess amount, adjusted for earnings, distributed to you from the plan.
Withdrawing Excess Deferrals by April 15th:
- Excess deferrals withdrawn by April 15th are included in your gross income for the year you made the contribution.
- Earnings on the excess deferrals are taxed in the year they are distributed.
- The distribution isn’t subject to the 10% early distribution tax.
Failing to Withdraw Excess Deferrals by April 15th:
- The excess is still taxable in the year of contribution.
- It is not included in your cost basis, meaning it’s taxed again when distributed later.
- Allowing the entire deferral to remain in the plan can jeopardize the plan’s qualified status.
Corrective distributions are reported to you on Form 1099-R.
Overall Limit on Contributions: Employer and Employee
Beyond the employee elective deferral limit, there’s an overall limit on total annual contributions (annual additions) to your 401k accounts with one employer. This limit includes:
- Elective deferrals (excluding catch-up contributions)
- Employer matching contributions
- Employer nonelective contributions
- Allocations of forfeitures
The annual additions cannot exceed the lesser of:
-
100% of your compensation, or
-
Specific dollar amounts that change annually:
- $69,000 ($76,500 including catch-up contributions) for 2024
- $66,000 ($73,500 including catch-up contributions) for 2023
- $61,000 ($67,500 including catch-up contributions) for 2022
- $58,000 ($64,500 including catch-up contributions) for 2021
- $57,000 ($63,500 including catch-up contributions) for 2020
Keep in mind that SIMPLE 401(k) plans have separate, lower limits.
Example 1: In 2020, Greg, 46, contributes the maximum amount ($19,500) to his employer’s 401(k). He also has a solo 401(k) from independent contractor work. He can’t make further elective deferrals to his solo 401(k) because he’s already maxed out his personal limit. However, he can make a nonelective contribution of up to $57,000 to his solo 401(k), because the limit on annual additions applies separately to each plan.
Example 2: If Greg were 52, he could contribute an additional $6,500 in catch-up contributions for 2020. He could split this between the plans or contribute the full amount to his solo 401(k), for a total contribution of $63,500.
Compensation Limit for Contributions
Annual contributions to your accounts cannot exceed the lesser of 100% of your compensation or the dollar limits mentioned above. Also, the amount of your compensation that can be considered for contribution calculations is limited. For example, it was $345,000 for 2024, $330,000 for 2023, $305,000 for 2022, $290,000 for 2021 and $285,000 for 2020.
Maximizing Your 401k Contributions
Understanding these limits allows you to strategically plan your contributions. Consider these tips:
- Contribute at least enough to get the full employer match. This is essentially free money.
- If possible, max out your contributions each year. The earlier you start, the more time your investments have to grow.
- If you’re 50 or older, take advantage of catch-up contributions.
- Regularly review your contribution strategy. Adjust it based on your income, financial goals, and any changes to the 401k limits.
By understanding and utilizing these guidelines, you can take control of your retirement savings and work toward a more secure financial future.
