Years ago employers moved from pensions to 401k plans, but most employees have no idea how their 401k works. This article examines the contribution rules for a 401k. There are additional links provided for further research.
401k Retirement plans
These days most medium to large companies offer a 401k plan. The problem is that most employees have no idea how to maximize their 401k. Here are the current rules, 2019 rules, for 401k Contribution Limits.
The 401k contribution rules published by the IRS show an increase in the max contribution from 2018. This means you can put more dollars way to work for you and grow tax deferred. The new contribution limit for 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $18,500 to $19,000. This is exciting news and so we would also like to offer some history and provide additional information regarding 401k retirement plans.
401(k) – What are the origins of the most popular employer sponsored deferred tax savings plan
The name for 401k plans originates from the subsection in the IRS code which contains the regulations which govern the implementation and daily operation of 401k retirement plans.
The law which started 401ks was put into place in 1978 but it was during the 1980s that it took hold. This plan was cheaper to operate than traditional pension plans. This is because the investment choices and the resulting losses or gains are the responsibility of the employee not the employer. It is the employee’s responsibility to save for themselves not the employer’s responsibility.
If you are going to take advantage of your 401k plan there are certain things that you have to be aware of. Things like how much can be contributed by you and by your employer, when are you able to withdraw funds, both timing and circumstances along with actually investing your money.
Contribution Limits For The 401(k) In 2019
During the 2019 tax year, the contribution limits for 401k plans goes up by $500, from $18,500 to $19,000. This is the amount that you can put away tax deferred into your 401k account.
The table below shows the changes in the maximum contribution starting in 2007.
Recent History of 401k Contribution Limits
2007 to 2008 $15,500
2009 to 2011 $16,500
2012 to 2014 $17,000
2015 to 2017 $18,000
Since just 2007 there has been $3,500 in contribution limit increases.
Employer Contribution Limits For 401(k) For 2019
Your employer can make contributions in your 401k account as well. are able. This means you can get FREE MONEY!
The employer contribution is usually a percentage match based on your contribution. A common example is an employer match of 50% of your contributions, up to 6% of your salary.
Many employers place a cap on how much you can contribute to the company’s 401k plan especially if you are a highly compensated employee aka HCE. Employees who make over $125,000 during 2019 you are considered an HCE and as a result you might have additional limits on your contributions. This can create additional complications but is designed to encourage more participation by employees who make less. You need to check with your employer to make sure what their rules are since they could be more restrictive than government rules.
2019 Catch-Up Limits for 401k Contributions
For employees over the age of 50 by the end of the 2019 tax year, you might be able to make additional catch up contributions into your 401(k) plan. Here is the recent history of those catch-up limits
Recent History of 401k Catch-Up Contribution Limits
2007 to 2008 $5000
2009 to 2014 $5500
2015 to 2019 $6000
Do Employer Contributions Affect Your Limit?
There is often confusion regarding whether or not the employer’s contributions impact the employee’s contribution limits. The answer is “No.”
The limits expressed in the 401k regulations are separate for both employer and employee and don’t impact one another.
Employee pre-tax compensation is $100,000
Employer matches 50% on the first 6% or $19,000 on the employee side and another $3,000 from the employer
For those over the age of 50, the employee could also put in an additional $6,000.
Maximum Contribution For 2019
The final thing that you need to know about 401(k) plans during 2019 is the maximum contribution.
The limit for all contributions for a 401(k) plan is $56,000 or 100% of the employee’s compensation, whichever is less. This takes into account employee contributions, employer matching and other contributions.
We hope that this helps. Take the time to look at other articles on our blog as well as the included links.
The information contained in this article is not designed to offer tax or legal advice. Each person, company or other entity is different and may or may not apply to this post. You should seek your own tax and legal advice and not rely on the information contained in this article.