 | | | How much can I contribute? | |
Your DC plan is one of the best ways to shield your earnings from taxes, but it has its limits. As of , the maximum pretax income you can stash in a 401(k) or 403(b) (the major plan types where pretax contributions are available) is $. This doesn't include any amounts that your employer may contribute as a match or any aftertax contributions, which some plans do allow.
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In addition, there's a limit on how much you can contribute to all of your tax-advantaged, defined-contribution accounts. This might include, for example, an ESOP (employee stock-ownership plan) or a profit-sharing plan on top of a 401(k). That total cap is generally equal to 100% of your annual gross salary or $, whichever you hit first, counting employer contributions.
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The government also further limits highly compensated employees--those who earn more than $ or own at least 5% of a company. Limits vary from company to company--complex rules govern this issue--but usually if you're a highly compensated employee you have a lower cap on your contributions. The point is to prevent those who make a lot more than the average worker from getting an unfair advantage for their retirement savings.
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| Most companies make sure you can't
contribute more than you're allowed, but if you somehow manage to do this--if
you've been holding two different jobs, for example--then you'll need
to consult with the companies' HR departments as soon as possible to try
to return the excess amount. If you discover the error too late, you'll have
to pay taxes on your mistake twice--once for the current year, and again when
you finally withdraw it.
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