A 401(k) is an employer-sponsored, tax-advantaged retirement plan. You finance this account by depositing a fixed percentage of your salary into the account. One of the biggest benefits of a 401(k) plan is that employers have the option to tie your contributions to your account to some degree. Although the IRS sets annual contribution limits on 401(k) contributions, employer agreements do not count toward that limit. However, there is a higher annual limit on total contributions, including employer matching. A financial advisor can help you resolve any questions about how your 401(k) works.
Employer agreement does not count towards the 401(k) limit.
Your input has two sides: what you provide as an employee and the match of your employer (if applicable). You can only contribute a certain amount to your 401(k) each year. For tax year 2023, the limit is $22,500, which is $2,000 more than in 2022. This contribution limit includes deferrals that you elect to be withheld from your paycheck and invested in your 401(k) before taxes.
The good news is that this limit does not take into account employer contributions. For example, if you contribute $20,500 to your 401(k) and your employer adds an additional $5,000, you’re still within IRS limits.
However, there is another limit that applies to total contributions; your employer contributions are taken into account for the total contribution limit. For the 2023 tax year, that limit is $66,000 ($73,500 if you include catch-up contributions for employees age 50 or older). This means that you and your employer can jointly contribute up to $66,000 towards your 401(k). Keep in mind, however, that most employers aren’t that generous with their contributions, so you’re probably in little danger of going over this limit.
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Employer match explained
There are a few different ways employers can match an employee’s 401(k) contribution. While the word “match” may imply that they contribute the exact same amount as you, that is often not the case. Sometimes they choose to contribute only a certain percentage of how much you contribute to your 401(k). For example, matching only 50% of your contributions. Even in cases where they match 100% of your contributions, they are only allowed to do so up to a maximum amount, whether that is a dollar amount or a percentage of your contribution or salary.
A percentage plan that employers implement matches 100% of your contribution, but limits it to a certain percentage of your salary. Say you earn $40,000 a year and your employer offers to match contributions up to 6% of your salary, or $2,400. If your employer wants to contribute that maximum amount, you must also contribute a minimum of $2,400. Bear in mind that if you invest more than that maximum, your employer will not top up the allowance.
Another employer may choose to match 50% of the contributions, which is again limited to a certain contribution amount. Take the same example of a $40,000 salary and a 6% limit; contributing that same 6% of your paycheck gets you $1,200 in employer contributions. In this scenario, pay close attention to the language your HR department uses when describing this benefit. The 6% may refer to the maximum amount they will contribute – in other words, they will contribute 6% of your salary ($2,400) as long as you contribute enough to make that within the 50% schedule (in this case, $4,800).
It may also mean that the 50% matching only applies to employee contributions of 6% of their salary. In this case, you wouldn’t be able to get more than $1,200 because they wouldn’t apply that 50% match to contributions above 6% of your salary.
Employer Agreement with a Salary of $40,000 (Sample) Employer Agreement Plan Employer Agreement Maximum Sample Contribution Employer Agreement Contribution Needed to Satisfy Employer Agreement Up to 50% 6% of Salary ($2,400) $1,200 $600 $4,800 Employer Match and you
Employer match programs are a way for employers to keep employees happy and cared for. They are also a way to retain employees. That’s because many matching programs come with a vesting schedule. This means that you will not have access to the full matching fund until you have been with the company for a certain period of time. The prospect of losing that money can keep an employee working longer.
In almost all cases it makes sense to make maximum use of your employer’s matching offer. This is basically free money, and all you have to do to get it is be a responsible saver.
That said, don’t contribute more than you can actually afford. Saving for retirement is crucial, yes, but you shouldn’t maximize your contributions by overpaying your mortgage or building an emergency fund. That’s especially true if you don’t think you’ll be staying with the company long enough to fully vest. After all, this would reduce the benefit of matching. Still, if it’s financially viable for you to maximize your matching, then do it.
401(k) Contribution Limits
In 2023, your limit for annual 401(k) contributions through an elective salary deferral is $22,500 or $30,000 if you are 50 or older. However, matching an employer does not count towards that limit. The combined contributions of an employee and an employer to a 401(k) account in 2023 are $66,000 or 100% of the employee’s compensation, whichever is less. Employer matching funds do count toward the $66,000 total contribution limit, but few employers are generous enough with their matching to reach that.
The more relevant employer matching limit is that of your employer itself. This is usually a percentage of your wages. If at all possible, you should maximize that. Your take-home pay will drop a bit, but the magic of pre-tax contributions means it won’t drop as much as you contributed. And you’ll be glad you contributed when you retire.
Please note that if you are 50 years or older, you can make additional catch-up
contributions. This encourages you to supplement your savings as you approach retirement. For 2023, the annual catch-up limit is an additional $7,500.
It boils down
The most important thing to understand is that any employer matching your company does to your 401(k) account will not affect your individual contribution limit. This means that maximizing these contributions can be a great way to get more money into your retirement account, and you don’t have to save or earn that money. If you have any questions about your 401(k) program and employer match, please ask your HR representative. That way, you can get a better idea of how you can contribute and how much you should have in your 401(k) to retire.
Tips for saving for your retirement
If you’re looking for practical guidance in planning your retirement, a financial advisor can help. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisor matches for free to decide which one is right for you. If you are ready to find an advisor who can help you achieve your financial goalsstart now.
To maximize your retirement savings, you may want to open other retirement accounts, such as IRAs. An IRA is an individual retirement account, meaning you are responsible for opening and funding the account. A Roth IRA is a variant that pays back the tax breaks so you get tax-free growth and retirement income instead of a prior tax deduction.
Want to make sure you’re on your way to a safe retirement? SmartAsset’s retirement calculator can help you determine how much you need for retirement.
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