All you need to know about 401k contribution limits

All you need to know about 401k contribution limits

The 401k is an employer-sponsored savings plan for eligible employees to save for their retirement through deferred salary contributions, which go towards an employee’s 401k account. These are all pre-tax contributions. However, there are certain 401k contribution limits to keep in mind. These have been mentioned below:

Basic contribution cap for the year 2017–2018
The limit for basic employee contribution for the year 2017 was around $18,000 per year. It has, however, been increased to around $18,500 for the year 2018. This includes all the contributions made after tax and salary deferrals to a 401k account. In case you have more than one 401k accounts, your contribution limits cannot exceed the limits mentioned above. However, any contributions made to other types of retirement accounts would not come under this limitation.

Contribution cap for people aged above 50
The primary purpose of a 401k account is to encourage savings towards a financially-stable future for participants. While young employees need to stay under the limits set by the Internal Revenue Service (IRS), employees aged above 50 years have different 401k contribution limits so that they can save more as they are nearing their retirement age. Apart from adhering to the limit of $18,500 in 2018, they may also contribute a catch-up amount of around $6,000 towards their 401k account to take more benefit of it when they retire.

Contributions by employers
Since it is referred to as an employer-sponsored program, there is a cap on the contributions made by employers as well; however, it is higher than the 401k contribution limits set for employees.

The employer contributions constitute of contributions made by the employees along with the employer and the additional elective employer contributions made to the 401k account. This is, however, irrespective of whether the employee meets the same standard of contribution or not. The limit for the year 2018 for the same is around $36,500, which has been increased from the threshold of around $36,000 in 2017.

Total contribution limits for 2017–18
There is a limit set by the IRS for total contributions made to the 401k account. The maximum contribution allowed to the 401k account for the year 2018 is around $55,000; moreover, around $61,000 is allowed for catch-up contributions. These include contributions of employees, employers, (both matching and elective), and a count of all the 401k accounts that you have under your name.

Additionally, highly compensated employees have more stringent limits so that they do not take undue advantage of a 401k account. Such employees can calculate the contribution they want to put in additionally towards securing their retirement years with a 401k account.

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