In 2023, the question of whether or not employer match contributions count towards the 401K limit still remains. It is important to understand what the 401K limit is, how it works, and how employer match contributions affect your contribution limit. This article will provide you with all the answers you need to understand this complex topic.
What is the 401K Limit?
The 401K limit is the maximum amount that you can contribute to your employer-sponsored 401K retirement plan each year. This limit is determined by the IRS and changes annually. For the 2023 tax year, the 401K limit is $19,500. This is the maximum amount that you can contribute to your 401K regardless of any employer match contributions.
What is an Employer Match?
An employer match is an employer-provided contribution to your 401K retirement plan. The employer will match a certain percentage of your contributions up to a certain amount. For example, an employer might offer a 3% match on your contributions up to $5,000. This means that if you contribute $5,000, your employer will also contribute $5,000 to your retirement plan. Employer matches are an excellent way to save for retirement, as the employer is essentially giving you free money.
Does the Employer Match Count Towards the 401K Limit?
The short answer is no, the employer match does not count towards the 401K limit. The 401K limit is the maximum amount that you can contribute to your 401K each year, regardless of any employer match contributions. This means that if you are receiving an employer match, you can still contribute the full amount of the 401K limit.
Are There Any Exceptions?
Yes, there are some exceptions to the rule. If your employer offers a “true-up” match, then this employer match contribution will count towards the 401K limit. A true-up match means that your employer will match your contributions up to the maximum allowed by the IRS. For example, if your employer offers a true-up match of 6%, your employer will match up to $19,500. This means that the total amount you and your employer contribute to your 401K cannot exceed the 401K limit of $19,500.
What Happens if I Contribute More Than the 401K Limit?
If you contribute more than the 401K limit, you will be subject to a 6% excise tax. This tax is paid by you, and it is calculated on the amount of your contributions that exceed the 401K limit. In addition, you will also have to file an IRS Form 5329, which is used to report the excess contributions and pay the excise tax.
Can I Contribute to an IRA if I'm Already Contributing to a 401K?
Yes, you can still contribute to an IRA even if you are already contributing to a 401K. The amount that you can contribute to an IRA is determined by your income level, and it is independent of the 401K limit. However, you are still limited to the total amount that you can contribute to all retirement accounts in a given year. This total limit is known as the “catch-up” limit, and it is currently $26,000 for the 2023 tax year.
Conclusion
In conclusion, employer match contributions do not count towards the 401K limit. However, if your employer offers a true-up match, then this employer match contribution will count towards the 401K limit. It is important to remember that you can still contribute to an IRA in addition to your 401K, and that there is a “catch-up” limit that limits the total amount you can contribute to all retirement accounts in a given year. By understanding the 401K limit and how employer match contributions work, you can maximize your retirement savings and ensure that you are taking full advantage of your employer’s benefit program.
