A 401(k) is a tax-advantaged, employer-sponsored retirement plan. You fund this account by depositing a set percentage of your paycheck into the account. One of the biggest benefits of a 401(k) plan is that employers have the ability to match your contributions to your account up to a certain point. While the IRS imposes annual contribution limits on 401(k) contributions, employer matches do not count against this limit. However, there is a higher annual limit for aggregate contributions, which includes employer matching. A financial advisor can help you resolve any questions about how your 401(k) works.
Employer correspondence does not count toward the 401(k) limit
There are two sides to your contribution: what you provide as an employee and your employer’s match (if any). You can only contribute a certain amount to your 401(k) each year. For the 2023 tax year, the limit is $22,500, which is $2,000 more than the 2022 level. This contribution limit includes any deferrals you choose to withhold from your salary and invest in your 401(k) on a pre-tax basis.
The good news is that this limit does not include employer matching contributions. If you contribute, say, $20,500 to your 401(k) and your employer adds an additional $5,000, you are still within IRS limits.
However, there is another limit that applies to global contributions; your matching employer contributions count toward the overall contribution limit. For the 2023 tax year, that limit is $66,000 ($73,500 if you include catch-up contributions for workers age 50 or older). This means that together you and your employer can contribute up to $66,000 to your 401(k). Note, however, that most employers aren’t as 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 several ways for employers to match an employee’s 401(k) contribution. Although the word “equal” may imply that they contribute exactly the same amount as you, this is often not the case. Sometimes they will choose to only contribute a certain percentage of your contribution to your 401(k). For example, only matching 50% of your contributions. Even in cases where they match 100% of your contributions, they can only do so up to a maximum amount, whether it’s a dollar amount or a percentage of your contribution. or your salary.
An employer-implemented percentage plan is 100% of your contribution, but caps it at a certain percentage of your salary. For example, let’s say you earn $40,000 a year and your employer offers to match you up to 6% of your salary, or $2,400. For your employer to contribute this maximum amount, you must also contribute at least $2,400. Keep in mind that if you contribute more than this maximum, your employer will not match the supplement.
Another employer can choose to match 50% of the contributions, which again is limited to a certain contribution amount. Let’s take the same example of a salary of $40,000 and a limit of 6%; paying that same 6% of your salary would earn you $1,200 in employer matching contributions. In this scenario, pay close attention to the language your HR department uses to describe this benefit. It may be that the 6% refers 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 reach that amount under the pay scale. 50% (in this case, $4,800).
Otherwise, it could mean that the 50% match only applies to employee contributions equal to 6% of their salary. In this case, you couldn’t get more than $1,200, because they wouldn’t apply that 50% match to any contribution over 6% of your salary.
Employer match with $40,000 salary (example) Employer match plan Example of maximum employer match contribution Match employer and you
Employer matching programs are a way for employers to keep their employees happy and supported. It is also a way to retain employees. Indeed, many matching programs come with an acquisition schedule. This means that you don’t have access to the full matching funds until you’ve been with the company for a while. The prospect of losing that money can keep an employee longer.
In almost all cases, it makes sense to maximize your employer’s matching offer. It’s effectively free money, and all you have to do to get it is be a responsible saver.
That said, you shouldn’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. This is especially true if you think you won’t stay with the business long enough to fully acquire it. After all, that would reduce the pairing advantage. Still, if it’s financially possible for you to max out your match, do it.
401(k) contribution limits
In 2023, your limit for annual 401(k) contributions through an optional salary deferral is $22,500 or $30,000 if you’re 50 or older. However, any employer correspondence does not count towards this limit. The combined employee and employer contributions to a 401(k) account in 2023 are $66,000 or 100% of the employee’s compensation, whichever is lower. Employer matching funds count toward the overall $66,000 contribution limit, but few employers are generous enough with their matching to reach it anyway.
The most relevant boundary to matching employers is that of your employer themselves. It is usually a percentage of your salary. If possible, you should maximize this. 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 to retirement.
Don’t forget that if you have reached the age of 50 or more, you can make additional catch-up contributions. This encourages you to increase your savings as you approach retirement. For 2023, the annual catch-up limit is an additional $7,500.
Conclusion
The most important thing to understand is that any employer matching what your company does in your 401(k) account does not affect your individual contribution limit. This means that maximizing those 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 questions about your 401(k) program and your employer, speak to your human resources representative. This way, you can get a better idea of how to contribute and how much you should have in your 401(k) to retire.
Tips for saving for retirement
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If you’re looking for practical advice for planning your retirement, a financial advisor can help. SmartAsset’s free tool connects you with up to three approved financial advisors who serve your area, and you can interview your advisor for free to decide which one is right for you. If you’re ready to find an advisor who can help you reach your financial goalsstart now.
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To maximize your retirement savings, you may want to open other retirement accounts like IRAs. An IRA is an Individual Retirement Account, which means you are responsible for opening and funding the account. A Roth IRA is a variety that defers tax benefits so you get tax-free growth and retirement income rather than an upfront tax deduction.
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Want to make sure you’re on the right track to a secure retirement? SmartAsset’s retirement calculator can help you figure out how much you’ll need for your retirement.
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