What’s the Maximum Amount You Can Contribute to a 401(k)?
I previously wrote a post about contributing to a 401(k), as well as another one where I addressed a few common questions about the subject (see Related Posts at the end of this article). But judging by the amount of visitors landing on my website after searching for different variations of “maximum amount of money you can put in a 401(k) every year”, I decided to address the topic specifically. In fact, there are several different limits that apply to a 401(k) plan in order to determine how much you can contribute to your 401(k) on any given year.
The IRS limit and your employer’s contribution limit
For 2008, the maximum amounts you can contribute to your 401(k) plan, as set by the IRS is 15,500. This is the IRS limit, but you are also subject to the limits imposed by your company’s 401k plan. For example, if your employer’s 401k plan allows you to contribute up to a maximum of 10% of your salary, and you earn $50,000, your effective contribution limit is $5,000, even though the government’s limit is higher. However an employee in the same company who earns $200,000 a year would not be eligible to max out at 10% ($20,000) because the 2008 401k contribution limit imposed by the government is $15,500. This limit applies regardless of whether you participate in just one 401k plan, or if you participate in two or more 401k plans.
Catch-Up 401k Contribution Limits
If you are age 50 or older, you may also be eligible to make “catch-up 401k contributions” in addition to your regular 401k limits — IF your employer allows them. (Unfortunately, your employer is not required to do so.) 401k catch-up contributions are limited each year to an additional $5,000, bringing the limit up to $20,500 for people aged 50+.
Post-tax contributions (if applicable)
An alternative to the regular 401(k) plan is the Roth 401(k), which is pretty much a mirror image of the 401(k). While the regular 401(k) allows you to invest with pre-tax dollars, let your money grow tax-deferred and pay taxes only upon withdrawal, the Roth 401(k) does the opposite: you contribute with after tax dollars but that money is forever exempt of taxes. Referring again to our previous example, your employer may allow you to contribute post-tax dollars to a Roth 401(k) after reaching your $5,000 pre-tax limit. Just make sure that no matter how many plans you participate in, the sum of your contributions (pre-tax and post tax) does not exceed the IRS limit for that year.
Your employer’s match (if applicable)
Many employers will match your 401(k) contribution, up to a certain amount. Under our previous example, you contributed $5,000 (10% of your $50,000 salary). If your employer matches $0.50 on the dollar, they will put another $2,500 in your account. This matching contribution made by your employer is NOT counted toward your contribution limits. It’s also possible that your employer offers a match on post-tax contributions (somewhat rare, but not unheard of). Even if you’re able to contribute the maximum amount ($15,500) each year, your employer’s matching contributions are in addition to this limit.
The section 415(c) limit
This is the OVERALL cap on contributions. That means that you total contribution to all your 401(k) plans (pre-tax, post-tax, and company match) cannot exceed this limit. It’s the lesser of 100% of the employee’s compensation or $46,000 for 2008. In layman terms, if you’re earning less than $46,000 a year, your yearly income is your contribution limit. Past this mark, no matter how much you earn, your total 401(k) contributions can’t exceed $46,000.
Exceeding contribution limits
If you contribute more than the limit to 401(k) accounts in a given year, the excess must be withdrawn by April 15th of the following year. This violation most commonly occurs when you switch employers mid-year and the latest employer does not know to enforce the contribution limits on your behalf. It can also happen if you have 2 jobs because each company handles its own contributions separately. Employers do not typically plan for this type of situation when designing their 401(k) plans. If this violation is noticed too late, you may have to pay taxes and penalties on the excess. The excess contribution, as well as the earnings on the excess, is considered “non-qualified” and cannot remain in a qualified retirement plan such as a 401(k).
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