How much can I contribute to my 401(k)? A 401(k) plan, also known as a defined contribution or DC plan, is a great way to save for a secure future, but there are limits to how much you can save each yearâ€¦
How much can I contribute?
Your DC plan is one of the best ways to shield your earnings from taxes, but it has its limits. As of 2015, the maximum pretax income you can stash in a 401(k) or 403(b) (the major plan types where pretax contributions are available) is $18,000. This doesn't include any amounts that your employer may contribute as a match or any aftertax contributions, which some plans do allow.
In addition, there's a limit on how much you can contribute to all of your tax-advantaged, defined-contribution accounts. This might include, for example, an ESOP (employee stock-ownership plan) or a profit-sharing plan on top of your 401(k). That total cap is generally equal to 100% of your annual gross salary or $53,000, whichever you hit first, counting employer contributions.
The government also further limits highly compensated employees--those who earn more than $115,000 or own at least 5% of a company. Limits vary from company to company\y--complex rules govern this issue--but usually if you're a highly compensated employee you have a lower cap on your contributions. The point is to prevent those who make a lot more than the average worker from getting an unfair advantage for their retirement savings.
Most companies make sure you can't contribute more than you're allowed, but if you somehow manage to do this--if you've been holding two different jobs, for example--then you'll need to consult with the companies' HR departments as soon as possible to try to return the excess amount. If you discover the error too late, you'll have to pay taxes on your mistake twice--once for the current year, and again when you finally withdraw it.