401(k) Contribution Limits

The 401(k) plan contribution limit for 2024 is $23,000, an increase from $22,500 in 2023. Individuals aged 50 and above have the option to contribute an extra $7,500. Find out the current 401k contribution limits to maximize your retirement savings.

A 401(k) is a vital tool for retirement savings that many companies offer to their employees. This defined contribution plan allows you to save a portion of your paycheck for the future, with the added benefit of tax deferral. Tax deferral means that the money you contribute to your 401(k) is deducted from your taxable income, resulting in immediate tax savings. However, when you eventually withdraw funds from a Traditional 401(k) upon retirement, those withdrawals will be subject to ordinary income tax rates.

While the 401(k) offers great tax advantages, there are limits to how much you can contribute each year. These limits are set by the government to ensure that high-income earners don’t disproportionately benefit from the tax advantages of these retirement accounts.

Understanding the rules and limits associated with your 401(k) contributions is crucial in maximizing your savings. Let's delve into the details of 401k contribution limits and how you can make the most of this valuable retirement savings tool.

401(k) Contribution Limits in 2023 and 2024

The Internal Revenue Service (IRS) sets 401(k) contribution limits each year. The contribution limit typically increases annually or every few years to account for inflation. In years of higher inflation rates, these limits usually go up more compared to years with more manageable inflation rates. If you’re over 50, you can also make additional catch-up contributions. 

Here are the various 401k contribution limits and thresholds, including the employee contribution limit and catch-up contribution limits.

401(k) Contribution Limits

For the year 2024, the contribution limits for 401(k) plans have been set at $23,000 for employee contributions, and $69,000 for the combined total of employee and employer contributions.

For those aged 50 or older, there is an opportunity to make catch-up contributions, allowing for an additional $7,500 to be contributed, bringing the total employee contribution limit to $30,500. This catch-up provision is designed to help older workers who may need to ramp up their retirement savings in the later stages of their careers.

Limits for Employer Match Benefits 

Your employer may match your 401(k) contributions up to a certain amount every month. In 2024, the limit on total employer and employee contributions is $69,000, from $66,000 in 2023. With the catch-up contribution, it puts that 2024 total limit to $76,500 ($73,500 in 2023)

The most common partial match employers provide is 50% of your salary, up to 6% of what you put in. This means that your employer will match half of whatever you contribute but no more than 3% of your salary. 

You have to put in 6% to get your employer’s maximum match. Let’s say you put in 10% — your employer will still only put in 3%. Note: Your company may express how the match is offered in a few different ways — but these all mean the same thing:

• 50 cents on the dollar up to 6%
• 50% on the first 6%
• 3% on 6%

However, there are varying methods for calculating employer match, and percentage match varies by employer. You can speak with your company's HR department to understand employer match opportunities. The 401(k) contribution limit does not include whatever percentage your employer is willing to match. This means that if your employer offers to match your contributions, your yearly contribution could exceed the standard $23,000 limit. 

401(k) Limits for High-Earning Employees 

Highly compensated employees must abide by different rules and regulations that define how much they can contribute. The IRS defines a highly compensated employee (HCE) as one who either makes more than $125,000 a year and is in the top 20% of compensated employees or owns at least 5% of the company.

HCEs cannot contribute more than 2% above the average amount a lower-compensated employee contributes within the company. For example, if the average lower-compensated employee contributes 3%, the max an HCE can contribute is 5%. 

These rules and regulations are protected by yearly nondiscrimination tests the IRS runs. If the HCE contributes more than 2%, the excess amount may be refunded to the individual at the end of the year as taxable income. These guidelines are in place to protect 401(k) plans from favoring HCEs. 

401(k) Catch-Up Contributions

You can make catch-up contributions to your 401(k) if you’re over 50. It’s designed to help people nearing retirement make extra contributions. These additional contribution limits can also change yearly, like the standard 401(k) contribution limit. The limit in 2023 for this type of contribution is $7,500, which means you can reach an annual 401(k) limit of $30,000.

After-tax 401(k) Contribution Limits

After-tax contributions are additional contributions you can make to your 401(k) plan beyond the standard pre-tax and Roth contributions. While these contributions have the potential to benefit from investment growth while they’re in your account, it’s important to note that you may still have to pay taxes on that money when you withdraw funds in retirement.

Should You Contribute the Maximum to Your 401(k)?

How much you contribute to your 401(k) depends on your income, lifestyle and contribution ability. Sure, you’re going to hit your retirement goals faster if you contribute the maximum, but you may want to take other things into consideration — even if you have the money to max out your account.

Here are some questions to ask yourself first: 

1. Are you putting money into other important accounts like an emergency fund? 
2. Do you have credit card debt or other forms of debt?
3. Do you have the right insurance policies — like health insurance and life insurance? 

In other words, you might not want to sacrifice other aspects of your life and wealth to max out your 401(k).

What Happens If You Contribute Too Much to Your 401(k)?

Contributing to your 401(k) is a smart financial move, but did you know that contributing too much could result in costly penalties? If you overcontribute to your 401(k), you may incur a 10% fine plus any unpaid income taxes on the excess contributions when you finally withdraw them. This can be a significant financial setback, so it's important to monitor your contributions and ensure you stay within the limits.

Most 401(k) plans have safeguards in place to prevent overcontributions, but there are situations where you may accidentally save too much in your 401(k). One common scenario is if you switch jobs midyear and end up contributing to two separate plans without realizing it. In this case, you could exceed the annual contribution limit without even realizing it.

If you find yourself in a situation where you have overcontributed to your 401(k), it's important to take action promptly. By April 15 of the following year, you must request that any excess contributions be returned to you, including any earnings it may have accrued while it was in your 401(k). This is necessary to avoid facing penalties and taxes on the excess amount.

When you withdraw the excess contributions from your 401(k), they will be reported on Form 1099-R when you file your taxes. This amount will be considered taxable income, so it's essential to include it on your tax return and pay any applicable taxes on it.

How to Maximize Your 401(k) Contributions

Here are a few tips to get the most out of your 401(k):

• Start contributing as early as you can: Saving early is crucial for a successful retirement. The longer your money is invested, the more it can benefit from compound interest. Compound interest allows your investment returns to earn returns of their own.
• Contribute up to the maximum limit: By contributing the maximum amount, you can take advantage of the tax benefits and compound interest that comes with investing in a 401(k) plan.
• Take advantage of employer matching contributions: Employers often offer a 401(k) match based on employee contributions, typically around 50 cents to $1 per dollar contributed, with a cap at a certain percentage of total pay. It is recommended to contribute enough to receive the full match.
• Increase your contributions annually: Consider increasing your 401(k) contributions annually as your salary increases. The higher contribution limits allow for more savings in the long run, even with small increases annually.
• Consider catch-up contributions: Individuals aged 50 and older can make catch-up contributions to their 401(k) plan, allowing them to contribute more than the regular limit to increase retirement savings.
• Keep track of your contributions: People often forget about old 401(k) plans from previous employment. Keeping track of these accounts can help maximize savings. If you find money in an old plan, learn about rollover options.
• Review your investment options: Regularly review and diversify investment options in your 401(k) plan to maximize returns, adjust based on risk tolerance and goals, and seek advice from a financial advisor if unsure.

Contribute to the Limit (or not!)

Generally, contributing as much as possible to a 401(k) can help you stabilize your income in retirement and plan for your future. Be sure to max out any employer match contributions. Otherwise, you'll leave cash on the table. 

Wondering if your company offers a match? First, visit your company’s human resources department to find out more about what the company offers. Your next stop might be with a reputable financial advisor to determine a plan for your 401(k), other retirement savings and future goals. Taken together, you can create a plan that secures your retirement and helps you create new financial opportunities.

Frequently Asked Questions