How the 401(k) Max Contribution Works

By Justin Pritchard, CFP®

You can save a substantial amount of money in a workplace retirement plan like a 401(k). The annual limits are higher than the limits for IRAs, and there are several ways to get money into your account.

On this page:

How the 401(k) maximum contribution works, including the different pieces, dollar limits (or the annual maximum), tax treatment, and some frequently asked questions.

This may be helpful if you’re fortunate enough to be able to contribute the maximum, or if you’re just curious how all of this works.

While 401(k) is a catch-all term, these same limits often apply to most of the following:

  • 403(b) plans
  • 457 plans
  • Thrift Savings Plan (TSP)

Just to be safe, check to see if your plan has the same limits. Be aware that SIMPLE IRAs and SEPs work differently.

What I find is that not everybody reaches the maximum each year. But clients are sometimes surprised at how much they can contribute. And if you’re self-employed, you have a lot of control over how you can set up your own 401(k) plan.

As a refresher, here are the current limits, and we’ll break down all of these pieces below.

TypeWho?Pre-Tax Allowed?Roth Allowed?20222023
Total limitAll sources
$61,000 plus catch-up
$66,000 plus catch-up
Salary deferralEmployeeYesYes$20,500$22,500
Catch-upEmployeeYesYes$6,500$7,500
MatchingEmployerYesNo
Profit-sharingEmployerYesNo

Continue reading below, or get similar information from this video.

How the Max Limit Works

A 401(k) plan can receive funds in several different ways:

  • Employee contributions: You have the option to contribute out of your pay through “salary deferral.”
  • Employer contributions: Your employer might match your contributions, offer profit sharing, or make other types of deposits to your account. Sometimes those contributions are optional for the employer, and sometimes they’re required to help satisfy rules that enable everybody to contribute.

Employer contributions are always pre-tax contributions. As a result, you’ll generally owe income tax on that money when you withdraw funds. That’s because employers get a tax deduction for making those contributions to the plan.

The IRS says that if somebody got a deduction, somebody will need to pay taxes on the withdrawals. That’s even true for nonprofits: The money is generally taxed when it comes out.

Employee contributions may have more flexibility. Depending on how your plan is set up, you can potentially choose from:

  • Pre-tax contributions that reduce your taxable income for the year. You’ll generally owe taxes on 100% of the money you withdraw later.
  • Roth after-tax contributions do not offer a current-year tax deduction. But if you satisfy the requirements, you can take tax-free income in retirement.
  • Voluntary after-tax contributions are not widely available (with only 21% of Vanguard plans offering this feature in 2021), but your plan might be an exception. You don’t get a deduction, but any growth in that bucket would be taxable—unless you convert the assets to Roth.
  • Catch-up: When you’re at least 50 years old by year-end, you may be allowed to contribute more.

Chart detailing types of contributions, source, and tax treatmentAnnual limits increase periodically with inflation. The IRS often announces any adjustments for the coming year near the end of a calendar year.

Note that SIMPLE plans and other types of plans have different limits and features.

How Contributions Work With Limits

You can reach the max contribution limit in several ways. For example, if your compensation is high enough, you might reach the limit entirely with employer dollars. But most people work their way up.

Example: Assume you earn $85,000 per year and max out your 401(k). Your employer matches your contributions dollar-for-dollar up to 4% of pay. You are over 50 and qualify for a catch-up. Your additions for the year might look like this:

  1. Salary deferral: $22,500, plus
  2. Employer matching $3,400
  3. Catch-up: $7,500

Waterfall chart of maxing out 401k with various contribution typesTotal additions to the plan for the year would be $33,400. If the annual limit was $66,000 (or $73,500 since you’re over 50), that leaves $40,100 until you reach the maximum. If your employer chooses to make additional profit-sharing contributions, that’s the maximum amount you’d be allowed to receive.

Employer contributions do not count against employee contributions.

When your employer makes matching or profit-sharing contributions, those additions do not reduce the amount you’re allowed to contribute. So, if your salary deferral limit is $22,500 but your employer adds $5,000 as a matching contribution, you should still be able to contribute $22,500.

There may be some instances when the employer contribution reduces the amount you need to contribute through salary reduction. That’s a nice problem to have, and typically only applies to very high income earners.

Do IRA contributions affect 401(k) contribution limits?

No. If you contribute to an IRA, your ability to contribute to a 401(k) plan is not reduced.

Do you get separate limits for Roth and pre-tax contributions?

No. The salary deferral limit consists of pre-tax and/or Roth contributions combined. You can put 100% toward Roth, 100% toward pre-tax, or do a mixture of contributions (like 70/30 or 50/50).Either way, the total dollar amount must stay under the annual salary deferral limit.

Working Multiple Jobs

Let’s say you have some self-employment income or you work for more than one employer. It may be possible to contribute to more than one retirement plan in a single year, but you need to use caution.

In particular, you want to be mindful of the salary deferral limit (the amount you contribute out of your pay). That limit is combined per taxpayer. In other words, you (as a single taxpayer) can only hit that limit once—and all salary deferral contributions are combined. But there may be one or two exceptions. If you have a 457 plan (often available to government workers like city employees), you may have a separate and additional employee contribution limit.

In other words, if you have a 401(k) and a 457(b), you can potentially double your salary deferral contributions. Assuming you have the cash flow to do so, that means some significant savings in pre-tax, Roth, or both types of accounts.

The employer contribution limit, or total limit, is another factor. When you have more than one employer—and the employers are not “related”—that overall limit is not aggregated like the salary deferral limit. In other words, profit-sharing contributions could potentially enable you to max out more than one retirement plan in the year.Example of maximum contribution to multiple 401k plans with employer contributions

If you have any self-employment income, it’s worth exploring how you can maximize the total contributions across all plains. Of course, your self-employment work needs to be for an unrelated employer, so that might not work if you own and work for multiple businesses.

Keep in mind that other types of retirement plans are also counted separately. A defined benefit (or “pension”) plan may be allowed to receive significantly more in contributions, even if you reach the salary deferral or overall limit.

These rules can get quite complicated when you have multiple plans available, so always triple-check with your CPA. This is just a surface treatment to start the conversation.

Limitations on 401(k) Contributions

In some cases, you might not be able to make the maximum 401(k) contribution for a given year. That can happen for several reasons, including:

  • Nondiscrimination tests: If your plan fails nondiscrimination tests, your ability to contribute could be limited. That may be the case for so-called highly-compensated employees (HCEs) when other employees do not participate. This can be fixed relatively easily by adding a “safe harbor” contribution or taking other actions.
  • Plan limits: Many plans allow you to contribute up to the maximum with few restrictions. But occasionally, plans limit your contributions. That’s often a relic of an old plan design, and can usually be updated. Check with your plan administrator.
  • Limited income: If you only work for part of the year (or a few weeks), you might not have enough income during that year to max out your contribution.

What if Your Job Doesn’t Offer a 401(k)?

Not all employers offer retirement plans. If you don’t have a 401(k) or similar plan available, you’ll need to save for the future elsewhere. You can also ask your employer to consider starting a plan, as they might not know there is an appetite for saving.

Alternatives to saving in a 401(k) include:

  • Contribute to an IRA (pre-tax, Roth, or nondeductible), if you’re eligible.
  • Save money in a taxable account. You can often use the same investments, but the tax features are different.
  • Invest your HSA if you have savings or you’re eligible to contribute.

FAQs

When do I need to complete contributions by?

For employee salary deferral contributions, you generally have to use payroll. So, your contributions would go in on a calendar-year basis, and the last pay period of the year would typically be your last contribution to the plan for that year. Employer contributions can often wait until the employer’s tax-filing deadline plus extensions, but employers can also match every pay period, if they choose.

While self-employed people may have some leeway, it’s critical to work with a tax expert to avoid IRS problems.