One component of having a 401(k) account to manage your retirement savings is dealing with contribution limits. Contribution limits are regulations that allow only a certain amount of funds to be transferred into your account(s). There are specific limits put in place, and those limits vary depending on your age when you are contributing funds, the type of 401(k) account you have and whether it is you or your employer contributing the funds.
It is very beneficial for you to be knowledgeable about the contribution limits your 401(k) plan has so that you are able to plan your contributions ahead of time. In addition, understanding what total amount of money you may be able to receive from your employer can help you to maximize that amount as well. Different employers have different contribution amounts that they provide, however there are IRS regulations that place a cap on the total amount of money an employer is allowed to contribute each year. For more information on the 2018 contribution limits of a 401(k) account, read the information below.
Your Contribution Limits
The limits for contributions into a 401(k) account are subject to change every year, and often increase. Because of this, it is very important that you stay up-to-date on the changes so that you can ensure that you never miss the opportunity to contribute more money if you are financially able.
For 2018, the contribution limits placed on employees for a traditional, safe harbor or Roth 401(k) account is $18,500 per year. This limit has increased by $500 because the contribution limit in 2017 was $18,000. This contribution limit includes all of your optional income deferrals, which is when you have a portion of your salary placed into the account. If you have a Roth account within your 401(k), this also includes any after-tax contributions.
If you happen to have more than one 401(k) account, you must know that the $18,500 limit applies to all of your accounts as a whole. This means that your total contributions to all accounts must not exceed $18,500. This contribution limit applies to any type of 401(k) account, both Roth and traditional. However, if you have other accounts set up for retirement such as an IRA, payments to those non-401(k) accounts do not affect your contribution limit.
Catch-Up Contribution Limits
Once you reach the age of 50 or older, your contribution limits change. This is done to help incentivize those who are getting closer to their retirement age to contribute more funds into their accounts. The IRS allows you to make additional contributions after you have reached the standard contribution limit. If you are 50 years of age or older, you may contribute an additional $6,000 to your 401(k) account after you have already contributed that year’s maximum. That extra $6,000 that you are allowed to contribute is called a catch-up contribution because it allows you to “catch-up” if you need more funds in your account before you retire. Therefore, the maximum annual contribution you can make to your 401(k) if you are 50 or older, including the catch-up contribution, is $24,500 in 2018.
Limits for SIMPLE 401(k) Plans
If you participate in a SIMPLE 401(k) plan, your contribution limits are lower than the limits placed on the other types of 401(k) plans. The employee contribution limit in 2018 is $12,500, and the catch-up contribution limit if you are older than 50 years of age is $3,000.
Limits for Highly Compensated Employees
If you earn a very high salary at your employment, you may be considered a “highly compensated employee” or HCE for short. Highly compensated employees are subject to more strict regulations regarding contribution limits. This is because wealthy 401(k) participants may end up receiving an unfair amount of tax deferral benefits through the system. To prevent this, HCE’s are subject to Actual Deferral Percentage (ADP) testing. The IRS uses ADP testing to ensure that tax benefits provided are proportional to the income of the participant, meaning that wealthy employees receive similar tax benefits as low-income employees. In addition, the contribution amount may be limited for HCE’s if there is very low participation in the 401(k) by low-income employees.
Employer Contribution Limits
A big benefit for utilizing a 401(k) account for your retirement savings is that you may be able to take advantage of employer contributions. If your employer opts to do so, they may contribute a certain amount of money into your account. This contribution can match a percentage of what you pay, with most employers offering to match around 50 percent of your contribution up to a certain amount. To discover what the contribution is that your employer has established, and to learn when you can expect employer contributions to start, you must contact whoever is managing your 401(k) account.
While the exact formula used by your employer to match certain payments is completely up to the company, there are limits placed on the total amount that an employer can contribute to your account. These contributions are capped just like employee contributions are, only they are capped at a higher level.
For the year of 2018, the annual employer contribution limit is $36,500. This includes only the contributions provided by the employer such as employer matching of employee contributions and any additional elective employer contributions; this limit does not include any funds from you.
Total Contribution Limits
Although the IRS certainly encourages you to participate in your 401(k) and contribute funds in order to prepare for your retirement, there are limits imposed, as mentioned in the sections above. The total contribution limit in 2018 is $55,000, or 100 percent of your yearly compensation, whichever amount is less. This total contribution limit includes both employer matching and other elective contributions along with employee salary deferrals and after-tax Roth 401(k) contributions.
However, the total contribution limit does not include the catch-up contribution that can be added. As mentioned above, if you are 50 years of age or older you are eligible to contribute an additional $6,000 annually to your 401(k). This means that in total, for a traditional, Roth or safe harbor plan, your contribution limit would be $61,000 since it includes both the total contribution limit of $55,000 and the $6,000 catch-up contribution.
Since the contribution limits for each plan can change from year to year, it is very important to stay as up-to-date on the changes as possible. Knowing what the limits are each year can allow you to contribute the maximum amount if you choose to and will help you to take advantage of any applicable employee-matching funds if your employer opts to provide any.