Are you looking to maximize your retirement savings through a 401k plan? If so, you may have heard that employer matching contributions count toward the 401k limit. But what does that mean, exactly? In this article, we'll explain the 401k limit and how employer matching contributions factor into it.
Understanding the 401k Limit
The 401k limit is the maximum amount of money that an employee can contribute to their 401k plan in a given year. The current limit for 2021 is $19,500, or $26,000 for people who are age 50 or older. The limit is set by the IRS and is subject to change. Employees who exceed the limit may be subject to penalties.
The limit applies to the employee's contribution only; it does not include any contributions made by the employer. Employers may choose to match employee contributions up to a certain percentage of their salary. For example, an employer may choose to match 50% of the employee's contribution, up to a certain amount.
Does Employer Match Count Toward 401k Limit?
The short answer is no. Employer matching contributions do not count toward the 401k limit. This means that employees can continue to contribute up to the limit even if their employer is matching their contributions. However, the amount of the employer match is subject to certain limits.
The IRS places a limit on the amount of money that an employer can contribute to an employee's 401k plan. This limit is known as the "annual addition limit". For 2021, the annual addition limit is $58,000, or 100% of the employee's pay, whichever is less. This limit applies to all employer contributions, including matching contributions and non-elective contributions.
Importance of Monitoring Contributions
It's important to keep track of your contributions to make sure that you don't exceed the 401k limit. If you do, you may be subject to a 6% excise tax on the excess contributions. You may also be required to withdraw the excess contributions and pay income taxes on them. To avoid this, it's important to make sure that the total amount of your contributions, including employer matching contributions, does not exceed the limit.
Other Considerations
In addition to the 401k limit, employers may have certain restrictions on the amount of money that they will match. For example, an employer may only match up to a certain percentage of the employee's salary or up to a certain dollar amount. It's important to check with your employer to find out what their matching policies are.
In addition, employers may also have other rules that apply to their 401k plans. These rules may include restrictions on when you can withdraw money from the account or when you can make changes to your investments. It's important to familiarize yourself with these rules in order to make sure that you are taking full advantage of your employer's 401k plan.
Conclusion
Employer matching contributions do not count toward the 401k limit. This means that employees can continue to contribute up to the limit even if their employer is matching their contributions. However, employers may have certain restrictions on the amount of money that they will match, so it's important to check with your employer to find out what their matching policies are. It's also important to make sure that the total amount of your contributions, including employer matching contributions, does not exceed the limit in order to avoid any penalties.
