2018 401(k) Contribution Limits, Rules, and More
The amount you can invest has increased in 2018
Your 401(k) contribution limits are a combination of three factors. Salary deferral contributions are the funds you elect to invest out of your paycheck. Catch-up contributions are additional money you may pay into the plan if you are age 50 or older by the end of the calendar year. Finally, employer contributions consist of funds your company contributes to the plan; also known as the company match or matching contribution, they may be subject to a vesting schedule.
There are two types of limits: a limit on the maximum amount you can contribute as a salary deferral and a limit on the amount of total contributions, which includes both your and your employer's contributions.
2018 Salary Deferral 401(k) Contribution Limits
Reflecting a rise in inflation, the IRS has increased the salary deferral contribution limit by $500. As a result, individual plan participants can contribute up to $18,500 of their wages in 2018. For those ages 50 and older, the catch-up contribution remains capped at $6,000.
2018 Total Annual 401(k) Contribution Limits
Total contribution limits have also risen for 2018—by $1,000. The maximums are now:
- $55,000 total annual 401(k) contribution limit if you are age 49 or younger
- $61,000 total annual 401(k) contribution limit if you are age 50 or older
The dollar amounts listed above represent the total maximum amount that can be contributed as a combination of both your own and your employer’s contributions. The age 49-and-younger limit is called a Section 415 limit. The catch-up contributions can be made in addition to the Section 415 limit, which is what makes the age 50 total contribution limit equal to the Section 415 limit plus the maximum allowable catch-up contribution.
In addition to these allowable contribution amounts, you can sometimes contribute additional amounts to other types of plans, like a 457 plan, a Roth IRA, or a traditional IRA. It all depends on your income and the types of plans available to you.
401(k) for Self-Employed People
If you are self-employed, you can set up what is sometimes called an Individual K or Solo K plan. This savings and investment vehicle allows you to contribute salary deferral contributions as an employee and make profit-sharing contributions as the employer.
Types of 401(k) Contributions That the IRS Allows
Many 401(k) plans allow you to put money into your plan in all of the following ways:
- 401(k) pretax contributions: Money is put in on a tax-deferred basis—that is, it's subtracted from your taxable income for the year. You’ll pay tax on it when you withdraw it.
- Roth 401(k) contribution (called a Designated Roth account): Money goes in after taxes are paid. All the gain is tax-free, and you pay no tax when you withdraw it.
- After-tax 401(k) contributions: Money goes in after taxes are paid, meaning it won't reduce your annual taxable income. However, you will not pay taxes on the amount when you withdraw it. You might have tax due, at your ordinary income-tax rate, on any interest that's accumulated tax-deferred on the amount—though you can avoid this bite by rolling over the sum into a Roth IRA.
How Much Should I Contribute to My 401(k)?
Most of the time, at a minimum, you want to contribute enough to your 401(k) to receive all employer matching contributions that are available to you. Careful analysis and tax planning should be used to determine which type or types of 401(k) contributions (i.e., deductible contributions or Roth contributions) will be most beneficial for you.
How Should I Invest My 401(k) Money?
You’ll also need to consider how to invest your 401(k) money. One option, which most 401(k) plans offer, is target-date funds, in which you pick a fund with a calendar year closest to your desired retirement year; the fund automatically shifts its asset allocation, from growth to income, as your target date approaches. These funds also have model portfolios you can choose, online tools to help you assess how much risk you want to take, and what fund choices will match up best with your desired level of risk.
How Do I Get Money Out of My 401(k)?
Your 401(k) money is intended for retirement. It is not easy to take money out while you are still working without incurring a steep financial loss. It is structured that way on purpose so that you are compelled to let the money grow for your future use.
Past 401(k) Salary Deferral Contribution Limits
Every few years, the IRS increases the amount that individuals can invest in their plans. Previous years' contribution limits are as follows: