This article was updated on Oct. 17, 2016.
The employer-sponsored 401(k) is one of the most common and popular retirement savings tools in the United States. Not only can contributions reduce your tax bill, but they can also be augmented by employer contributions -- meaning free money.
Here's a breakdown of how much you can contribute to your 401(k) in 2016, how much your employer can contribute, and a few important rules about contributions for a few specific situations, including those over 50, and so-called "highly compensated employees".
Employee contribution limits for 2016
The limit on employee contributions for your 401(k) in 2016 is unchanged from last year, at $18,000. For those with SIMPLE 401(k) plans (you'll know if this is what you have) the limit is $12,500 in 2016.
The amount is unchanged primarily because inflation has been relatively low in recent years, so a cost-of-living adjustment was not implemented. So if you're routinely a maximum contributor, you'll have to wait at least another year before you can contribute a higher amount.
Catch-up contributions for those 50 and older
If you're 50 or over, the IRS allows you to contribute even more money to your retirement account than those under 50. If you qualify for these "catch-up" contributions, you can contribute an additional $6,000 to a regular 401(k), and an extra $3,000 to a SIMPLE 401(k) in 2016. This is also the same as in 2015.
How do you qualify? Simply by being 50 or older. You don't have to be "behind" in your retirement savings goals or below a certain threshold. However, your employer may restrict these contributions, so check with your company to be sure they allow them.
Employer contribution limits
Employer contributions are commonly referred to as "matching contributions," but there is no IRS rule that says employers can only match employee contributions. Your employer can put money in your 401(k) even if you don't contribute, and each company is allowed to set its own policies for how it contributes to an employee's 401(k). Note: The rules are a little different with SIMPLE plans and can vary across employers, so check with your employer if you have a SIMPLE 401(k).
The total amount that can be contributed to a 401(k), including both an employee's maximum of 18,000, and any contributions from the employer, is $53,000 for those under 50. For those 50 and over, add the $6,000 in catch-up contributions for a total of $59,000 in contributions in 2016.
The catch, of course, is how much your employer will match, and how much it requires you to contribute to get that match.
For example, if your company matches 100% of your contributions up to 5% of your salary and you make $50,000 per year, that's $2,500 from you, and $2,500 from your employer, far below the maximum contribution limits.
The point is, make sure you understand how much your employer will put in based on its matching policy, and be sure you're -- at the very least -- contributing enough to get the maximum employer contribution.
Highly compensated employees
At some companies, highly compensated employees may have limits on how much they and their employer can contribute to their 401(k), based on a measure of the annual contribution and deferral percentages across all employees. The idea behind these rules is to prevent a company's retirement plan from discriminating in favor of highly compensated employees.
Since each company is different, you should contact the retirement or human resources department of your company if you are a high-wage earner and are concerned that you could be affected by this rule.
Summing it up
Here's a breakdown of the limits for 2016:
- Under 50? $18,000 employee contributions; $53,000 total including employer contributions.
- 50 and above? $24,000 employee contributions; $59,000 total, including employer contributions.
The limits are also the total per person for 2016, not per 401(k). In other words, you cannot contribute more than the totals above if you have multiple employers with 401(k) accounts. Lastly, remember that these are the IRS limits, and your employer's policies probably mean lower real limits to what you can contribute. Reach out to the proper department at work to get those answers today.