Does my employer's matching contribution count towards the maximum I can contribute to my 401(k) plan?
No, your employer’s contribution does not count toward your contribution to your 401(k) plan. In 2018, an employee can contribute up to $18,500 (or up to $24,500 if you are 50 or over) regardless of the employer’s contribution amount. These limits are set by the federal government.
How Matching Works
As you suggested, many employers match a portion of your contribution, often up to a limit based on your salary. Here’s how this works:
Let’s take a situation where an employer matches 50% of your 401(k) contribution, up to a limit of 6% of your compensation. In this case, if you earned $50,000, you would need to contribute $6,000 to your 401(k) plan to obtain your employer’s maximum match of $3,000 (6% of $50,000). If you earned $85,000, you would need to contribute $10,200 to obtain your employer’s maximum match of $5,100 (6% of $85,000). In both cases you are still below the maximum $18,500 (or $24,500 for those age 50 and over) allowed by law, so you could decide to increase your personal contribution. But you are taking the crucial step of maximizing the match you can obtain from your employer.
This extra $3,000 employer match in your 401(k) is free money, and one of the best retirement investments you can make. Think of it as an immediate 50% return on your investment. So it is always a good idea to set up your 401(k) salary-deferral contribution to maximize your employer match. If you can contribute even more, up to the maximum of $18,500 (or $24,500), so much the better.
No, the employer’s match does not count towards the maximum that you can contribute to your 401(k) plan as an employee. In 2018, employees can contribute up to $18,500 to his/her 401(k), usually made as a deferral from their paycheck. If the employee is 50 years or older, an additional $6,000 can be contributed as a “catch-up” contribution (total of $24,500).
Many employers match employees’ 401(k) contributions up to a certain limit. It’s important to note, the total contribution limit from all sources for 2018 is $55,000 if you are under the age of 50 and $61,000 if age 50 or older ($6,000 catch up). These TOTAL contribution amounts include all employee and employer contribution amounts.
Most commonly, employers either match the employee’s payroll contribution through:
- A dollar for dollar percentage (100%) up to a set percentage of the employee’s annual salary
- Or 50% up to a set percentage of the employee’s annual salary
Example #1: Let’s say you earn $60,000 per year and your employer offers a 100% match of your contribution up to 5% of your annual salary. For the year, your employer will match up to $3,000 (5%) as long as you contribute at least $3,000 of your money into the plan. If you contribute 4% ($2,400), then your company will only match up to the 4% amount. If you contribute $6,000, your company will match up to their limit of $3,000 (5%).
Example #2: You earn $60,000 per year, and your employer offers a 50% match up to a 5% limit. Your employer will only match 50 cents for every dollar you put in up to the 5% limit. Let’s say you contribute $6,000 (10% of your salary). Your company will match 50% of the $6,000 = $3,000 (5% limit). On the other hand, if you only contributed $3,000 (5% of your salary), your company would only match up to 50% of the $3,000 = $1,500. Thus, you’d receive a smaller matching contribution than what you could be getting if you contributed more.
Hope this was helpful! As always, it is important to consult with a CFP® professional or tax advisor with additional questions.
No, your personal contribution to your 401(k) and your employer’s contribution are considered separately and have different contribution limits. For 2018, you will be able to contribute up to $18,500 to your 401(k) plan regardless of how much your employer contributes to your account. If you are age 50 and over, there is a catch-up provision that allows you to contribute an extra $6,000, which permits you to contribute up to a maximum of $24,500. The IRS included the catch-up provision to allow individuals closer to retirement to save more. If you are interested in more information, the IRS website is a great resource.
Simple answer is no.
A 401(k) is an employer sponsored qualified retirement program. When considering contributions, there are two sides of the program- what you contribute (employee) and employer(company) contributions. According to IRS guidelines, in 2016 an employee is allowed to contribute a maximum (work earning) of $18,000 a year. If you are over 50 years of age you may contribute an additional (from work earning) $6,000 for a total of $24,000 this year, as long as you have at least that amount in income. Of course you can contribute anywhere from 0 to $18,000 or if over 50 the catch up amount. Many people believe the contribution limit is a percentage, but it is really a fixed amount. Any contribution from an employer match is not included in your income contribution limit. An employer can match in many ways from a straight percentage, 0,1,2,or 3%, which is the most common or more, of salary to a percentage of fifty cents of the employee contributions up to 6% of your gross salary. Contributions to a 401(k) are pretax meaning contributions come out before Federal, State, or City taxes. The employer match is a nice benefit and if you can afford contributions, contribute at least the amount to get the match.
Before contributing to a retirement plan make sure you can afford contributions, because if you need to withdraw funds there are some stiff penalties and tax consequences if you withdraw before you are 59 1/2. Review your contributions at least annually to ensure the plan/ contributions meets your long term risk tolerance and goals.
In most circumstances, the answer to this question is no, but depending on your circumstances, this question could get complicated. The maximum you, the employee, are permitted to contribute to a 401(k) in the year 2016 is $18,000. If you are the age of 50 or older, you will be permitted to contribute an additional $6,000 for a total employee contribution limit of $24,000. This $6,000 is often referred to as “catch-up”. Essentially, your employer's matching contribution doesn't necessarily count towards the maximum you can contribute to your 401(k), but your employer's overall contribution can count towards how much is overall contributed to your 401(k).
Besides employee contributions, there are other forms of additions that can come into your 401(k). All forms of additions are listed below:
- Employee contributions
- Employer matching contributions
- Employer nonelective contributions
- Allocations of forfeitures
Employee contributions have a threshold of $18,000 ($24,000 catch-up) that is permitted in a year - employer matching contributions, employer nonelective contributions and allocations of forfeitures do not have individual thresholds, but all of them combined together have a threshold of $53,000. If your compensation is less than $53,000, 100% of compensation will be the threshold.
Here's an example to better understand this concept. Assume we have an individual that is 40 years old, earns $75,000 and receives a 100% employer match up to 4% of compensation. This person contributes the annual maximum they are permitted to them of $18,000. Their employer matches 100% of contributions up to 4% of compensation which, in scenario, is $3,000. Currently, we have total annual contributions of $21,000 ($18,000 + $3,000), this leaves $32,000 ($53,000 - $21,000) remaining that could potentially be contributed through employer nonelective contributions or allocations of forfeitures.
I hope this was helpful.
To answer your question, try to picture two piles of cash in front of you. One pile says “Employee Salary Deferral”, which is directly from you. Another pile says “Employer Matching”, which comes from the employer.
The employee salary deferral has an annual limit that is prescribed by the IRS each year. For 2016, it’s $18K. Knowing that limit helps you decide what percentage or a flat dollar amount you can stash away each month. The employer matching depends on the 401(k) plan summary language and varies from company to company. The highest I ever heard was 12%, the lowest could be zero. Regardless how you defer or how your employer matches, the sum of the total amount cannot exceed another limit imposed by the IRS. For 2016, that number is $53K.
One last note: if you are age 50+, you can defer another $6K, which makes the total employee contribution to $24K. Hope that helps!