Because 401(k)s are tax-advantaged, they have a maximum annual contribution limit set by the IRS. That limit sometimes gets adjusted from year to year.
401(k) contribution limits for 2019 and 2020
|Age||2019 401(k) contribution limit||2020 401(k) contribution limit|
|50 or older||$25,000||$26,000|
Note that the amounts above are the “elective deferral limit” — the amount you, as an employee, are allowed to contribute out of your salary each year. Employer matching dollars do not count toward that limit.
» Planning to max out? Continue saving for retirement in an IRA
Employer contribution rules
There’s a reason employees are encouraged to take advantage of employer-matched 401(k) plans: free money. Employers who match employees’ contributions often do so between 3% and 5% of your salary. So if you make $50,000 and contribute 5% of your salary ($2,500) and your employer matches that 5%, you’ll add $5,000 to your balance each year.
The 401(k) also has an annual total contribution limit, which caps the combined amount you and your employer can contribute. In 2020, your total 401(k) contributions — from yourself and your employer — cannot exceed $57,000 or 100% of your compensation, whichever is less. That limit rose from $56,000 in 2019.
Limits for highly paid employees
The IRS has a test that helps employers who sponsor 401(k) plans assess each year whether employees are participating in their plan at levels proportionate to the employees’ compensation. If the test determines that people across compensation levels are not participating in a manner the IRS deems proportionate, employee contribution levels for highly compensated employees can be lowered. In these cases, your employer may need to return some of your excess contributions.