401k contributions are tax-deferred, meaning you don’t pay income taxes on the money you contribute to your account. This is a significant advantage since it allows your money to grow faster. However, there are limits to how much you can contribute each year. For example, your employer may offer a matching contribution, which means the company will match a certain percentage of your contribution. But does that count towards the annual limit? Let’s take a closer look.
- What Are 401k Matching Contributions?
- What Is a Partial 401k Match?
- What Is a Dollar-For-Dollar 401k Match?
- Non-Matching 401k Contributions
- Matching Contributions for a Roth 401k
- Does Employer 401k Match Count Towards The Annual Limit?
- 401k Contribution Limits Overview
- 2022 and 2023 Contribution Limits
- How 401k Plan Contribution Limits Work
- What Is a Good 401k Match?
- Alternatives To An Employer 401k Match
- Next Steps
- Want To Contribute More Annually?
- Frequently Asked Questions
- Related Reading
What Are 401k Matching Contributions?
An employer-offered 401k matching contribution is when they deposit money in your 401k account that equals the contributions you make, with a limit. Your boss may match your contribution or only contribute part depending on the 401k ‘s requirements. Some employers also make non-matching 401(K) contributions separate from employees’ contributions.
Although employer-matching 401k contributions are not required by law, they can be a key employee benefit that helps an organization keep prized talent and construct solid teams.
Many employers offer matching contributions to 401ks. The average employer contribution in 2019 was $4,100, slightly more than $1,000 each quarter.
401k plans that vest employer contributions over a set period of years mean that the company’s employees must ultimately stay with the organization for a specific timeframe to take ownership of matching funds.
Vesting is a way for employers to keep their best employees by rewarding them. When you finish the vesting schedule, you own all stock options.
What Is a Partial 401k Match?
An employer’s contribution with a partial 401k match is a fraction of the employee’s contribution. There is also a limit to how much the employer can contribute as a percentage of the employee’s salary.
What Is a Dollar-For-Dollar 401k Match?
An employer contributes the same dollar amount as their employee, up to a certain percentage of the employee’s salary, in a 401k plan.
A usual employer offer is matching 3% of your salary contributions dollar-for-dollar. However, my former employer bettered that by matching up to 7% dollar-for-dollar.
Non-Matching 401k Contributions
Employers make non-matching or profit-sharing contributions without considering whether an employee makes personal 401k contributions. Employers usually base their non-matching contribution amount on the company’s yearly profit or revenue growth.
Matching Contributions for a Roth 401k
You can only save money in a Roth 401k if your employer’s matching contributions go into a different traditional 401k account. The reason is that when you withdraw the employer contributions, you’ll have to pay regular income tax on them–there are only a few exceptions where Roth 401k withdrawals aren’t taxed.
Remember that with a regular 401k account, your contributions are taken out before taxes, and you pay income tax on the withdrawals. With a Roth 401k, however, your contributions are made with taxes already paid and usually qualify for tax-free withdrawal Further down the road.
Does Employer 401k Match Count Towards The Annual Limit?
Do you want to take advantage of a max contribution to a 401k? Do you know if your employer’s 401k match counts towards the maximum limit? The answer is yes, but does it count as a contribution from the individual, or does it count as an employer contribution? These two factors can make a huge difference.
401k Contribution Limits Overview
- Individuals can contribute up to $20,500 to a 401k in 2022 and $22,500 in 2023, or $27,000 if they are age 50 or over in 2022 and $30,000 in 2023.
- An employer match to an employee 401k does not count toward the employee’s annual contribution limit.
- There is a maximum amount that an employee and employer together can contribute to a 401k. The same restrictions apply to 403b, 457 plans, and Thrift Savings Plan (TSP).
2022 and 2023 Contribution Limits
If you’re an employee, in 2022, you may contribute up to $20,500 of your own money to a 401k and $27,000 if you’re 50 or older. If you’re an employee, in 2023, you may contribute up to $22,500 of your own money to a 401k and $30,000 if you’re 50 or older.
These are the 2022 and 2023 limits for specific retirement plans, including 401k, 403b, 457, and a Thrift Savings Plan.
The limit on total contributions from both the employee and employer can’t exceed the lesser of 100% of the employee’s salary or $66,000 for employees younger than age 50 and $73,500 for those age 50 or older.
How 401k Plan Contribution Limits Work
The 401k plan is a long-term savings plan designed to help people build their retirement savings. The IRS labels a 401k as a “qualified retirement plan,” which means it has certain tax benefits for the employee, the employer, or both.
The tax advantage for employees is that their contributions are deducted from gross income, not net income. That means less take-home pay, which lowers the employee’s taxes, and the money goes into an investment account on an ongoing basis.
For some 401k plans, employers can match some percentage of their employees’ contributions, but it’s strictly voluntary. The average 401k match ranges from 3% to 7% of the employee’s gross salary.
What Is a Good 401k Match?
A good 401k match is usually 5% to 7% of your salary, up to a dollar-for-dollar match. For example, if you contribute 5% of your $50,000 salary, your employer will contribute 5% as well, for a total contribution of 10%. If you contributed 7%, your employer would contribute the full 7%.
Alternatives To An Employer 401k Match
Deferred annuities can offer premium bonuses on contributions that mimic an employer’s 401k match with no annual limits.
For example, an annuity may offer up to an 11% bonus on all contributions for the first seven years of the annuity. The 11 percent premium bonus mimics the employer’s match, and the employee has no annual contribution limits.
Unlike a 401k, employees can open a deferred annuity without an employer.
An annuity could be the answer if you’re looking for a way to contribute more to your 401k. Deferred annuities offer premium bonuses on contributions that mimic an employer’s 401k match with no annual limits, making it easy to save for retirement. Use a 401k match calculator and request a quote today to see how much of a 401k you can earn from an annuity.
Want To Contribute More Annually?
Frequently Asked Questions
How Much Can I Contribute To My 401k?
The most you can contribute to a 401k is $22,500 for 2023 ($30,000 in 2022 for those age 50 or older).