Saving for retirement is one of the most crucial agendas an individual has in mind when they start working. One of the simplest and effective ways of fulfilling this purpose is by opting for the 401(k) plan that almost every employer in the country offers its employees. Contributing to the 401(k) plan is a sensible way of saving a significant amount of money that would otherwise go in taxes. According to these plans, the amount of money contributed to the 401(k) plan is deducted from the taxable income and presents you with the opportunity of saving hundreds of dollars each year.

The 401(k) has garnered immense popularity owing to its ability to help you save money for retirement by contributing a certain portion of your paycheck to the retirement account at the end of every month; however, there’s a limit to how much money you can contribute to the 401(k) plan. Every year, reviews and updates of the Individual Retirement Accounts (IRAs), maximum 401(k) contribution limits, and other retirement savings vehicles are conducted by the Internal Revenue Service (IRS). Moreover, these 401(k) contribution limits depend on your age and compensation levels as well.

It is imperative that one doesn’t exceed their said 401(k) contribution limits. There are the different types of 401(k) contribution limits; they are as follows:

• The elective deferral 401(k) contribution limit: It represents the amount of money that the owner of the 401(k) account can contribute from their own paycheck. The 401(k) contribution limit for the year 2017–2018 was $18,000 per year, and now it has been raised to $18,500 for the year 2018–2019. This 401(k) contribution limit includes everything, right from the elective employee salary deferrals to the after-tax contributions made to a designated Roth account within your 401(k). Moreover, if you hold multiple 401(k) accounts, your total contribution to all the 401(k) plans—including the traditional and Roth 401(k) plans—has to be $18,000 for 2017 and $18,500 for 2018–2019. However, you wouldn’t have to worry about your other retirement contribution such as IRAs since those contributions wouldn’t affect your 401(k) contribution limits.
• The catch-up 401(k) contribution limit: This 401(k) contribution limit is the additional money that is contributed by workers over 50 years to their retirement savings. This is done with the sole intention of helping those nearing retirement to accelerate their savings since simply living off the Social Security benefits isn’t advisable. Even if you are 50 years old and nearing retirement and have contributed $18,000 (2017–2018) for the year, you can still add another $6,000 to their 401(k) account. According to the 2018 401(k) contribution limits, an individual can add around $6,500 to their retirement savings. The maximum amount of money that an individual over 50 years of age can contribute to their 401(k) account, whether it is the traditional 401(k) plan or the Roth 401(k) plan, it cannot exceed $24,000 for 2017 and $24,500 for 2018.
• Employer’s contribution: Since 401(k) plans are offered by employers, you can avail of the benefits offered by the employer. In fact, this is one of the major advantages of opting for the 401(k) plan; you can take advantage of the employer’s contribution to your retirement savings. An employer’s contribution functions along the same lines as an employee’s contribution, but the former’s contributions are capped at a higher level. According to the 2017 rules, an employer’s contribution to the 401(k) plans was limited to $36,000 per year. An employer’s contribution includes the employer matching the employee contributions and any additional elective contributions that are made irrespective of whether the employee participated in it or not. The employer’s contribution limit to the 401(k) plan has now been raised from $36,000 for 2017 to $36,500 for 2018.
• Additional 401(k) contribution limits: This 401(k) contribution limit is basically the complete total of the elective deferral contributions, catch-up contribution, and the money contributed by the employer in matching the funds or bonuses. Moreover, the contribution limits for this 401(k) plan cannot exceed $55,000 in the year 2018. Caution has to be exercised here since it is imperative that the sum of the 401(k) plans do not exceed the said amount for the particular year. Also, it is imperative that only $18,500 of the total amount can be your contribution to the 401(k) plan; the rest of the $36,000 has to be your employer’s contribution.

Non-discrimination testing
Here’s another term that often arises when determining the 401(k) contribution limits. The amount of money people earn across the country varies from person to person. So, if you earn a very high salary, you fall into the category of a highly compensated employee (HCE). This implies that you will be subjected to stringent 401(k) contribution limits. This is done with the sole purpose of preventing wealthier employees from taking undue advantage of the tax benefits that 401(k) plans offer, and to put this scheme into action, the IRS makes use of the actual deferral percentage (ADP) tests which ensures that the employees of different compensation levels participate proportionally to their companies’ plans. It is imperative for HCEs to take part in the company plan; if this is not the case, then the amount of money the HCEs can contribute to the 401(k) plans is constricted.