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Does My Employer’s 401(k) Match Count Toward My Maximum Contribution?

The short and simple answer is no. Employer matching contributions do not count toward your maximum contribution limit as set by the Internal Revenue Service (IRS). Nevertheless, the IRS does place a limit on the total contribution to a 401(k) from both the employer and the employee.

Key Takeaways

  • You can contribute up to $19,500 to your 401(k) in 2021, or $26,000 if you’re age 50 or over (rising to $20,500 and $27,000, respectively, in 2022).
  • Any employer match that you receive does not count toward this limit.
  • There is a cap on total contributions to a 401(k) from both the employee and employer.
  • The same limits apply for 403(b) and 457 plans, and the federal government’s Thrift Savings Plan.

2021 and 2022 Contribution Limits

In 2021 you can contribute up to $19,500 of your own money to your 401(k) and $26,000 if you’re aged 50 or over. These figures rise to $20,500 and $27,000 in 2022.

These are also the 2021 and 2022 limits for a number of employee retirement plans that resemble the 401(k), including the 403(b), most 457 plans, and the federal government’s own thrift savings plan.

There is a limit on total contributions from both the employee and employer. It can’t exceed the lesser of either 100% of the employee’s salary or a certain limit. The limit in 2021 is $58,000, or $64,500 (rising to $61,000 and $67,500 in 2022).

The IRS imposes limitations on the 401(k) contributions of highly compensated employees. For 2021, highly paid employees can only use the first $290,000 of income when computing the maximum possible contributions (rising to $305,000 in 2022).

Understanding 401(k) Plan Contribution Limits

The 401(k) plan and the variations mentioned above are all long-term savings plans designed to help people build their retirement savings. They are all “qualified” plans, in IRS speak. That means they have certain tax benefits for the employee, the employer, or both.

The tax advantage for employees, in most cases, is that their contributions are deducted from gross income, not net income. That reduces take-home pay. Less take-home pay means lower taxes, softening the blow, and the money goes into an investment account week after week, building long-term net worth.

For some 401(k) plans, employers can match some percentage of their employees’ contributions, but it’s strictly voluntary. Among employers who offer a match, the average was about 4.7% of the employee’s gross salary at the end of the first quarter of 2020, according to Fidelity Investments. This is effectively a 4.7% salary bonus, and any personal financial advisor will tell you that it’s nuts not to take full advantage of it.

Contributions to 401(k)s and other retirement plans are limited by the IRS to prevent highly paid workers from benefiting more than the average worker from the tax advantages they provide.

Other Retirement Plans

The 2021 and 2022 contribution limits are the same for several other qualified retirement plans that are not as well known as the 401(k). These include the following:

403(b) Plans

This retirement plan is designed primarily for employees of public educational institutions, nonprofits, and hospitals. It is often structured as an annuity or a pension plan that pays in regular installments after retirement. That differs from the 401(k), which is a lump-sum account that the employee can draw from after retirement.

457 Plans

These plans are available primarily to public service employees such as police officers and firefighters. Unlike the 401(k), a 457 plan does not have a 10% tax penalty for early withdrawals.

Thrift Savings Plan

This is exclusively for employees of the federal government and military personnel. It is also affected by changes established by the SECURE (Setting Every Community Up for Retirement Enhancement) Act, which mostly went into effect. in Jan. 2020.

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