Does my employer's matching contribution count towards the maximum I can contribute to my 401(k) plan?
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.
No, your employer’s contribution does not count toward your contribution to your 401(k) plan. In 2016, an employee can contribute up to $18,000 (or up to $24,000 if you are 50 or over) regardless of the employer’s contribution amount. These limits are set by the federal government.
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 $18,000 (or $24,000 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 (or $5,100) 401(k) from the employer match is free money, and therefore 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 $18,000 (or $24,000), so much the better.
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.
In short, the answer to your question is no. The employer's matching contribution does not impact your maximum contribution of $18,000 in 2016 ($24,000 if at least 50 years old).
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!