Maximize 401(k) Contributions Without Exceeding the Limits
Doing your research when it comes to your 401(k) helps you make informed investment decisions.
We know that retirement might feel far away, but it’s closer than you realize. A 401(k) plan is often one of the best ways to save for those years. If your company offers a 401(k) plan, it’s generally a smart choice to participate, especially if part of your compensation includes the employer matching your contributions.
We realize that the contribution rules and limits can be confusing. If you’re trying to max out your personal contributions or get the most out of your company’s match to enjoy that “free money,” there are a few watchouts.
Below are some common 401(k) contribution limit questions to help you maximize your retirement savings.
401(k) contributions have individual and annual contribution limits that are adjusted annually. For all contributors, the 2022 individual limit was $20,500 and was raised to $22,500 for 2023. For those over 50, the catch-up contribution limit was increased from $6,500 in 2022 to $7,500 in 2023.
If you contribute beyond these limits, you should fix this before April 15th to avoid major tax implications.
It’s important to check on your contributions regularly, for example when you earn a pay raise, or you change jobs.
1. Is There a Limit on 401(k) Contributions?
When you decide to start putting money away for retirement you need to keep the contribution limits set by the Internal Revenue Service (IRS) in mind. These limits include an individual contribution limit and an overall contribution limit.
Both limits are adjusted each year based on cost-of-living and apply to traditional 401(k)s and Roth 401(k)s. In addition to adjusting these limits, the IRS may also adjust the catch-up contribution limit for participants over 50.
The individual contribution limit applies to the amount you can personally divert from your paycheck into your 401(k) account each year.
Type of Contribution
Catch-up Contribution (for individuals over 50)
The idea behind these limits is to keep the tax benefits fair between lower and higher compensated employees. Remember, money you put into your traditional401(k) isn’t taxed until you take it out. Taxes on withdrawals depend on your age and your income in that year.
Keep in mind that if you withdraw funds prior to age 59 ½, you will also pay a 10% early withdrawal penalty on your 401(k) distribution, unless an exception applies .
In addition to your individual contribution limit, there are also total annual limits on 401(k) contributions that apply to the combined total of contributions from you and your employer. We’ll talk about these limits next.
2. Do Employer Contributions Affect the 401(k) Contribution Limit?
Many companies offer a 401(k) match as part of your compensation package, so make sure you take advantage of this money—you’ve earned it! These types of programs may motivate you to save at a higher rate than you anticipated. You’ll thank them later when you have a bigger nest egg in retirement.
A company’s contributions don’t count toward your individual contribution limit. However, there are annual limits on how much you and your employer could collectively contribute to your 401(k) account.
The IRS enforces the following in total dollar contributions per account:
$61,000 for 2022 and $66,000 for 2023
$67,500 for 2022 and $73,500 for 2023 for individuals over 50
If you make less than these amounts, you and your employer cannot collectively contribute more than 100% of your total salary.
Let’s translate these numbers into an example. Say you were 34 in 2022. Since you were under 50, the IRS won’t allow you and your employer to collectively contribute more than $61,000 to your 401(k). Of course, if you earned less than $61,000 in 2022, you and your employer couldn’t have contributed more than 100% of your salary to your 401(k).
So, let’s say you contribute $22,500 to your 401(k) and your employer has a 6% match; this means they match the first 6% you put into your 401(k), so they contribute $9,000 to your account. This results in $31,500 being put into your 401(k) account in 2022, well below the annual contribution limit.
But what if you could afford to put more money into your 401(k)? That’s where after-tax contributions come into play.
After-Tax 401(k) Contributions
Some employers allow employees to contribute after-tax money to their 401(k) accounts. How does that work?
Let’s hop back to our example where $31,500 has been contributed to your account. If your plan allows for after-tax contributions, you could put up to $29,500 of after-tax money into your 401(k) before you hit the annual limit of $61,000 for 2022.
Not all plans allow for after-tax contributions, so be sure to check with your benefit specialist to see if this is an option for you.
3. If I Have More Than One 401(k), How Does the Limit Affect Me?
It’s rare to be contributing to two 401(k)s at the same time, but if you are, the individual and annual limits apply to the combined total of contributions to all 401(k) accounts, traditional and Roth, that you contribute to in a year.
The most common way to have multiple 401(k)s is by changing jobs mid-year and having a 401(k) with your previous employer. Be sure to pay attention to how much you’ve contributed to your 401(k) at your previous company when setting up contributions at your new company to avoid going over the contribution limit.
It may also make sense to roll your old 401(k) over to your new company’s plan. Chat with a financial advisor about the investment options for each plan to figure out which portfolio fits with your retirement goals and your risk tolerance.
4. Will My 401(k) Contributions Automatically Stop When I Hit the Limit?
Depending on the company you work for, your plan may automatically stop your contributions when you hit the limit. They may have measures in place to prevent you from setting your contribution amount too high or stop more money from going into your 401(k) once you’ve contributed the maximum.
However, not all companies have these policies in place, so you may have to watch your account and ensure that you aren’t adding too much money. Be sure to ask your benefits manager about your company’s safeguards when you set up your 401(k).
To help prevent going over the contribution limits, keeping the following in mind:
Check the contribution limits each year
Reassess your contribution amount whenever you get a salary adjustment
If you change employers, check how much you contributed to your previous 401(k) and factor that into your new contribution amount
If you accidentally overcontribute to your 401(k), you’ll want to act as soon as possible to avoid paying penalties.
5. What Happens if You Exceed the 401(k) Contribution Limit?
Let’s say you get a big raise in April (congrats!), but you don’t change your 401(k) contribution. The year ends and you get an update from your retirement plan, and you realize you contributed $35,000 to your 401(k) in 2022. Oops!
But this situation can be fixed. The first thing you should do is contact your plan administrator as soon as possible. They can help you resolve the situation by requesting a “corrective distribution” from your plan.
This corrective distribution will be added to your taxable income for the last year, so you will also receive an amended W-2. Any interest that was earned on the extra contributions will be included in your tax bill. These earnings are reported on a 1099-R Form.
Don’t wait too long to request this fix. If you withdraw the extra money before April 15, aka Tax Day, the money isn’t considered part of your gross income for that year. This means if you over-contributed to your 401(k) in 2022 and request a corrective distribution before April 15, 2023, the money that is refunded to you will only be considered part of your 2022 taxable income.
However, if you make the correction after April 15, 2023, the distribution is now considered part of your taxable income for 2022 and 2023. If you’re younger than 59 ½, you’d also pay a 10% early distribution penalty.
Keep in mind that the paperwork can take some time to process, so if you notice that you’ve put aside too much money, try to correct the situation as soon as possible.
If saving in a 401(k) is a key part of your retirement planning, then learning the rules of that 401(k) comes with the territory. As your contributions grow, knowing how to navigate the limits could save you some headaches (and money) along the way.
Of course, any retirement planning and preparation involves important money decisions, so be sure to do your research before making major adjustments. If you have questions about contributing to your 401(k), reach out to your plan administrator to learn more about your specific situation.