401(k) Contribution Limits in 2017-18

December 6, 2017 — 9:56 AM EST

Whether you are nearing retirement or just starting your career, it's always the right time to begin planning for your financial future. If your employer offers a 401(k), it can be one of the simplest and most effective ways to save for your retirement. While the chief advantage of a 401(k) plan is that it allows you to defer a portion of your paycheck to your retirement account each month automatically, there are some limitations on how much you can save.

Each year, the Internal Revenue Service (IRS) reviews and sometimes updates the maximum contribution limits for 401(k), individual retirement accounts (IRAs) and other retirement savings vehicles. Depending on your age and compensation level, you may be subject to different limits. Stay up-to-date on the most current regulations to ensure you make the most of your employer-sponsored plan.

Basic Limits for 2017-18

The basic employee contribution limit for 2017 is $18,000 per year; it rises to $18,500 in 2018. This includes all elective employee salary deferrals, as well as any after-tax contributions made to a designated Roth account within your 401(k).

If you hold multiple 401(k) accounts, your total contributions to all accounts – both Roth and traditional – cannot exceed $18,000 for 2017 and $18,500 for 2018. Any contributions you make to other types of retirement accounts, such as IRAs, do not affect your 401(k) contribution limit.

Catch-Up Contributions

To encourage those nearing retirement to accelerate their savings, the IRS allows 401(k) participants who are  age 50 or older to make additional contributions once they have maximized the standard contribution limit. If you are age 50 or older and have already contributed $18,000 to your 401(k) during the current year ($18,500 in 2018), you may make an additional $6,000 catch-up contribution. The maximum yearly contribution for 401(k) participants age 50 or older, including this catch-up contribution, is $24,000 for 2017 and $24,500 for 2018.

Employer Contributions

One of the chief benefits of participating in a 401(k) plan is the opportunity to take advantage of employer contributions. Like employee contributions, employer contributions are capped, but at a much higher level.

For 2017, employer contributions to 401(k) plans are limited to $36,000 per year, subject to the overall limit on total contributions discussed below. Employer contributions include any employer matching of employee contributions, as well as any additional elective employer contributions made regardless of employee participation. For 2018, this limit will increase to $36,500.

Total Contribution Limits for 2017-18

While the IRS encourages participation in 401(k) retirement savings plans for employees of all compensation levels, it imposes caps on the total amount that can be contributed in any given year, regardless of income. For 2017, the maximum allowable contribution to a 401(k) account – including employee salary deferrals and after-tax Roth contributions, as well as employer matching and elective contributions – is $54,000, or 100% of employee compensation, whichever is lower. If you are 50 or older, the $6,000 allowable catch-up contribution increases your yearly maximum to $60,000. This maximum total contribution limit applies to your aggregate contributions to all 401(k) accounts you may own. The maximum for 2018 is $55,000 ($61,000 with a catch-up contribution).

Your contributions are still limited by the employee contribution limits discussed above. If you are under 50 and earn $60,000 per year, for example, you are still only allowed to contribute $18,000 for 2017, and the remaining $36,000 of allowable contributions must come from your employer. If your employer only contributes $20,000, then your total annual contributions are effectively capped at $38,000 instead of $54,000.

Non-Discrimination Testing

If you earn a very high salary, you may be considered a highly compensated employee (HCE), subject to more stringent contribution limits. To prevent wealthier employees from benefiting unfairly from the tax benefits of 401(k) plans, the IRS uses the actual deferral percentage (ADP) test to ensure that employees of all compensation levels participate proportionately in their companies' plans. If non-highly compensated employees (NHCEs) do not participate in the company plan, the amount that HCEs can contribute may be restricted.