Saving for the future can feel like a big task, but your 401k plan makes it a lot easier! One of the great things about 401ks is that your employer often helps you save. They might match the money you put in, or they might just give you extra money on top of your contributions. But how does this employer help actually work with the amount of money you’re allowed to save each year? Let’s dive in to see how employer contributions play a role in those savings limits.
What’s the Overall Limit?
The government sets a limit on how much money you and your employer can put into your 401k each year. This is the overall limit, and it’s designed to help you save a good amount without going overboard.
Your employer’s contributions and your contributions both count towards this limit. This means that if your employer puts money into your 401k, it reduces how much more you can contribute in the year, and vice versa.
For example, if the annual limit is $69,000 (this number can change), and your employer puts in $10,000, then you (the employee) can only contribute up to $59,000 for that year. It’s like a team effort where you have to stay under the shared budget.
So, you need to keep track of both your contributions and any contributions your employer makes to make sure you don’t go over.
Matching Contributions and the Limit
Many companies offer a “matching” contribution. This means they’ll put in a certain amount of money based on how much you put in. For example, they might match 50% of your contributions up to 6% of your salary. This is awesome because it boosts your savings for free!
However, those matching contributions also count toward the annual limit. That’s right, it’s all part of the big picture. This can feel a little weird, but it makes sense when you think about it. They have to put a limit on how much goes in so everyone plays by the rules.
Let’s say your company matches your contributions dollar-for-dollar up to 4% of your salary, and you make $50,000 a year. If you contribute 4% ($2,000), your employer would also contribute $2,000. You’ll need to keep an eye on the overall limit for your 401k to make sure you’re not exceeding the amount allowed each year.
Here is a simple example:
- You Contribute: $10,000
- Employer Match (100%): $10,000
- Total Contributions: $20,000
If the overall limit is $69,000, you have plenty of room for more savings!
Profit Sharing and 401k Contributions
Some companies also offer profit-sharing plans, which is basically where they share some of their profits with employees, and they sometimes put this money into employees’ 401ks. This is like a bonus for your retirement savings!
Just like matching contributions, employer profit-sharing contributions also count toward the annual limit. So, if your company does well and contributes a lot through profit sharing, it could reduce the amount you can contribute yourself. You’ll want to pay attention to the total amount being put into your account.
Keep in mind that the way this works can vary from company to company. It might be a set percentage of profits, or it might depend on how well the company does.
A quick example of how this might look:
- You contribute: $15,000
- Employer profit sharing: $12,000
- Total employee + employer contributions: $27,000
You will have a lot more left over until you hit the overall contribution limit!
When Can You Exceed the Employee Contribution Limit?
There are two different types of 401k limits. One is the limit on the employee’s elective deferrals – that’s the money you choose to put in yourself. The other is the overall contribution limit, which includes both your contributions and your employer’s. These are two separate limits.
You, as an employee, may choose to contribute more than the employee contribution limit. However, you can NEVER go over the overall contribution limit, which is set by the government. If you contribute too much as an employee, you might have to pay taxes on the excess. It is critical to review your plan documents or talk to your HR or financial advisor about how this works.
For instance, let’s say the employee deferral limit is $23,000. However, the overall contribution limit is $69,000. If your company matches your contributions, and they contribute $46,000, you can still contribute $23,000.
The table below shows the differences:
| Contribution Type | 2024 Limit (Approximate) |
|---|---|
| Employee Elective Deferrals | $23,000 |
| Overall Contribution (Employee + Employer) | $69,000 |
As you can see, employer contributions, whether they’re matching, profit-sharing, or any other type, all have a huge effect on how much you’re able to put in for the year. By understanding how employer contributions work with the overall limits, you can plan out your savings strategy and make sure you’re getting the most out of your 401k. Remember to check in with your HR department, or read your plan documents to learn the specifics for your company!