401(k) Contribution Limits
Some Individuals Can Contribute up to $24,000 to a 401(k) Plan
It sounds like a win-win situation on the surface. You can contribute to a 401(k), investing in your retirement, and the Internal Revenue Service lets you do it tax-free – at least until you begin to withdraw the money and its earnings. You invest with pre-tax dollars, reducing your taxable income so you pay taxes on less earnings.
Now take a breath and step back to reality. Yes, you can do all this, but the IRS isn't known for unlimited generosity.
You can only contribute tax-free to a 401(k) up to certain limits per year. Of course, you can contribute more if you like, but you won't receive a tax break for the contributions.
2016 and 2017 Limits
Each year, the IRS sets limits for maximum contributions you can make to your 401(k) plan. Inflation remained relatively stable in 2016 so the limit was not adjusted upward. People can contribute up to $18,000 in 2017 as an elective salary deferral to a 401(k) plan, the same as they could in 2016. But if you're age 50 or older, you can make an additional "catch-up" contribution of $6,000.
Contribution limits have historically been set at the following thresholds:
|401(k) Contribution Limits by Year|
|Year||Elective Salary Deferral Limit||Catch-up contributions if age 50 or older||Total Possible Employee Contribution Limit||Source|
The limit applies to all 401(k) accounts you might have in the current year. If you work at two or more jobs or switch jobs in the middle of the year, you may have to track your 401(k) contributions to make sure they don't exceed the maximum allowed unless you don't mind contributing with taxed dollars.
Depending on your age, this may not make a lot of sense.
If you can contribute the maximum, it's probably easiest to break the annual limit down into equal installments per pay period. You'll be saving the same amount each pay period that way and will be dollar-cost-averaging into your retirement investments.
Elective salary deferrals can be placed into either a tax-deferred traditional 401(k) or into a post-tax Roth 401(k) account. You can even make a combination of contributions to both traditional and Roth accounts as long as the total of all salary deferrals are equal to or less than the annual maximum.
Your Employer's Contributions
Matching contributions from your employer are limited to 25 percent of your salary. If you're self-employed and funding your own 401(k), the matching contribution is limited to 20 percent of your net self-employment income. Matched funds are always contributed to the tax-deferred portion of the 401(k) plan.
The total of elective salary deferrals plus employer matching contributions is limited to $54,000 in 2017.
You can make deferred contributions from your last paycheck of the year, but your deadline is otherwise Dec. 31 for 401(k) contributions for tax years 2016 and 2017.