Does My Employer’s 401(k) Match Count Toward My Maximum Contribution?

The short and simple answer is no, but ....

If you participate in a 401(k) plan through your employer, congratulations. You've made a very important step toward securing your financial future. But keep in mind that you must adhere to the maximum contribution limits set by the Internal Revenue Service (IRS). Some employers also contribute to their employees' plans. If yours does, you may be left wondering whether those contributions affect how much you can sock away yourself.

The short and simple answer is, they don't. Matching contributions made by employers do not count toward your maximum contribution limit. But the IRS does place a limit on the total contribution to a 401(k) from both the employer and the employee.

Keep reading to find out more about contribution limits and what they mean to you.

Key Takeaways

  • Traditional 401(k)s allow employees of large corporations to invest and save pretax dollars for retirement.
  • Some employers match employee contributions up to a certain limit.
  • The IRS caps the amount of money you can put in a 401(k) each year (an amount adjusted annually for inflation).
  • There are limits on the combined employer-employee contribution amount to traditional 401(k) plans.
  • Non-corporate employees can also save for retirement through 403(b)s, 457 plans, and Thrift Savings Plans.

2022 and 2023 Contribution Limits

The IRS adjusts contribution limits to certain retirement plans each year based on inflation. The following are contribution limits for different 401(k) plans.

Traditional 401(k) Plans

Traditional 401(k) plans are set up by large corporations. These plans allow employees to put pretax money into a special retirement account portfolio that is composed of mutual funds of their choosing. Because this money is deductible from their gross income, individuals can reduce their taxable income and, therefore, their overall tax liability.

Taxpayers who participate in traditional employer-sponsored 401(k) plans can contribute a maximum of $20,500 per year in 2022. For tax year 2023, you can contribute up to $22,500. Additionally, if you're 50 years old or over, you can contribute an additional $6,500 in 2022 for a total of $27,000. For tax year 2023, you can contribute an additional $7,500 for a total of $30,000.

Employee and Employer Combined 401(k) Limit

The limit for combined contributions made by employers and employees cannot exceed the lesser of 100% of an employee's compensation or $61,000 for 2022 and $66,000 for 2023.

For people 50 and over, the catch-up contribution for 2022 increases this amount to $67,500 ($61,000 + $6,500). For 2023, it increases the limit to $73,500 ($66,000 + $7,500).

In order to start investing in a 401(k), make sure you understand how this plan works and how it's structured as the rules for each employer's offerings may differ. Figure out how much you're able to contribute from every paycheck. Also determine your risk tolerance, based on your age, investment goals, time to retirement, and investment strategy. Go through the investment options and choose the ones that make the most sense for you. Be sure to keep an eye on your portfolio and make adjustments if and when needed.

SIMPLE 401(k) Plans

A SIMPLE 401(k) plan is a simplified version of the traditional 401(k). These plans are established by small businesses with 100 or fewer employees and self-employed individuals. Those who operate sole proprietorships and partnerships can use these plans.

Employee contributions are lower than those for traditional plans. SIMPLE 401(k) plan contributions max out at $14,000 for the 2022 tax year and $15,500 for 2023. Those who are 50 and over can contribute an additional $3,000 for a maximum of $17,000 for 2022. For 2023, that catch-up figure rises to $3,500 for a maximum contribution of $19,000.

Another difference from the traditional 401(k) is that employers must make either a matching contribution of a maximum of 3% of a worker's salary or a nonelective contribution worth 2% of each participating employee's wages.

Solo 401(k) Plans

The Solo 401(k) is also referred to as a one-participant 401(k) plan or a Uni-k plan. This plan is designed for small business owners who have no other employees. The exception may be their spouse, as long as they work for the business.

The limit for contributions to this kind of plan is $20,500 for 2022 and $22,500 for 2023. Taxpayers who are 50 and older can make an additional catch-up contribution of $6,500 for year 2022, for a total of $27,000. For 2023, the catch-up amount if $7,500, for a total of $30,000.

An additional maximum of 25% of compensation can be contributed by an employer. So, not counting catch-up contributions, the combined employer-employee contribution limit maxes out at $61,000 for 2022 ($66,000 for 2023) or 25% of your adjusted gross income (AGI)—whichever is lower.

The IRS imposes limitations on the 401(k) contributions of highly compensated employees (HCEs). These individuals can only use the first $305,000 of income when computing the maximum possible contributions in 2022 ($330,000 for 2023).

Understanding 401(k) Plan Contribution Limits

The 401(k) plan and its variations are all long-term savings plans that are designed to help people build their retirement savings. The IRS considers them to be qualified plans, which means they have certain tax benefits for the employee, the employer, or both.

One tax advantage for employees, in most cases, is that their contributions are deducted from gross income. That reduces taxable income and lowers taxes. The other tax advantage is that money from every paycheck goes into an investment account, grows tax-deferred, and builds net worth over the long term.

Some employers choose to match a percentage of their employees’ contributions. When available, employees should take full advantage of it because it's effectively a savings bonus. For example, in 2020, the average employer match was about 4.7% of the employee’s gross salary, according to Fidelity Investments.

Contributions to 401(k)s and other retirement plans are limited by the IRS to prevent highly paid workers from benefiting more than the average worker from the tax advantages they provide.

Other Retirement Plans

The contributions limits referred to above for 2022 and 2023 are the same for several other qualified retirement plans (that may not be as well known as the 401(k)). We've highlighted some of these plans below.

403(b) Plans

The 403(b) plan works the same way as a traditional 401(k). However, it's designed for employees in the education and health care sectors, such as teachers, school administrators, librarians, doctors, and nurses. Individuals who work in tax-exempt organizations can also benefit, including clergy members, church employees, and those who work for 501(c)(3)s.

This plan is often structured as an annuity or a pension plan that makes distributions in regular installments when the account holder retires. This is a key difference from the 401(k), which is a lump-sum account that the employee can draw from in retirement.

457 Plans

The 457 plan is offered by governments at the state and local levels, as well as some nonprofit organizations. Public service employees such as police officers and firefighters can take part in the plan. Unlike the traditional 401(k), this plan does not have a 10% early withdrawal penalty.

Another key feature of the 457 plan is that it allows individuals who are nearing retirement to increase salary reductions. This provision helps people make up for the years they didn't participate in the plan as long as they were eligible. This means that an individual who is three years away from retirement may put twice the normal amount, or $41,000 into their 457 plan in 2022 (and $45,000 in 2023).

Thrift Savings Plans (TSPs)

Thrift Savings Plans (TSPs) are exclusively for employees of the federal government and military personnel. Participants can invest in six different funds through the program. And unlike the traditional 401(k), TSPs offer sliding employer matches. This means that the employer contributes 1% of your salary to a TSP even if you don't contribute. This maxes out at 5% with a 5% employee contribution. These often come with lower investment and administration fees as well.

What Is the Maximum 401(k) Contribution for 2022?

The maximum amount that an individual can contribute to a traditional 401(k) in 2022 is $20,500. Taxpayers who are 50 and over can make a catch-up contribution of $6,500 for a total of $27,000. Combined employer-employee matches cannot exceed $61,000 and $67,500 for individuals 50 and over.

What Does a “Highly Compensated Employee” Mean in Terms of a 401(k)?

For 2022, a highly compensated employee can only use the first $305,000 ($330,000 for 2023) of their annual income to calculate their maximum 401(k) contribution limit.

What Happens If I Exceed My 401(k) Limit?

You must notify the administrator of your 401(k) plan that you went over the contribution limit. Excess contributions and any related earnings must be withdrawn from your account by the April 15 deadline. All excess contributions will be taxed as ordinary income in the year they are made. If excess contributions aren't withdrawn before tax day, they will be taxed a second time as income in the tax year in which they are withdrawn.

The Bottom Line

The 401(k) retirement plan is a terrific savings opportunity for working Americans that offers tax-deductible annual contributions and potentially years of tax-deferred investing.

Part of the advantage of a 401(k) lies in the fact that employers may contribute certain amounts to their employees' accounts, adding to their saving power. This amount is in addition to the maximum contribution that employees are allowed by the IRS to make annually.

Article Sources
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