The fact that a 401(k) plan allows you to automatically save money out of your paycheck, makes it incredibly appealing. Plus, your employer might even match your contributions to help you easily and rapidly save for retirement.

With all the perks of a 401(k) in mind, it makes sense to make the most of it, but it should be known that you and your employer can only contribute so much to your 401(k) account each year. Staying mindful of contribution limits is important for maximizing your 401(k) account. 

Maximum 401(k) Contribution Limits for 2021 and 2022

Around November of each year, the IRS reviews and adjusts the maximum contribution limits for IRAs, 401(k) plans and other retirement savings accounts. In November 2021, the IRS increased the contribution limits for 2022.

If you have more than one 401(k) account, you should note that these limits are an overall limit. However, the contributions you make to other retirement account types, like traditional and Roth IRAs, are not factored into your 401(k) contribution limits.

Limits for 2022

Employees can contribute up to $20,500 to their 401(k) plans in 2022. If you’re over 50, the IRS allows you to make additional contributions of up to $6,500, bringing the total contribution limit to $27,000 for 2022. 

If your employer also contributes to your 401(k), you and your employer combined can contribute up to $61,000 in 2022 or up to 100 percent of your compensation. For those over 50, combined 401(k) contributions cannot exceed $67,500. 

What Happens if You Exceed 401(k) Contribution Limits?

The IRS simply does not allow an individual to exceed the contribution limits they have set, which is why it’s important that you evaluate your estimated contributions at the beginning of the year and then analyze your actual contributions at the end of the year.

If you discover that you have exceeded the contribution limits for a given year, you need to notify the IRS by March 1. They will return excess deferrals to you by April 15. If you fail to notify the IRS, whether intentionally or accidentally, your excess contributions will be taxed at six percent each year from the time they were deposited until the time you withdraw them.  

Roth IRA vs. Roth 401(k) Contribution Limits

A Roth IRA (Individual Retirement Account) has separate limits from a Roth 401(k) IRA, which is a Roth IRA that exists within your 401(k) plan. 

Roth IRA

A Roth IRA is set up by an individual and is subject to similar limits and rules as a traditional IRA. Your Roth IRA will grow without income tax at the time of withdrawal because contributions consist of after-tax funds. You cannot deduct your contributions to a Roth IRA,.

It’s important to note that Roth IRAs are limited based on income. How much you can contribute and whether or not you can contribute at all, will depend on how much you earn. In 2021 and 2022, you can contribute up to $6,000 per year to your Roth IRA account. If you’re over 50, you do qualify for a catch-up contribution of up to $1,000, raising the limit to $7,000 per year. 

Roth 401(k) IRA

A Roth 401(k) plan may be offered by your employer and it’s similar to a traditional 401(k), except it uses after-tax funds. The benefit of a Roth 401(k) is that your money can be withdrawn income tax-free, but it also means that you won’t receive a tax deduction for your contributions. 

Like a 401(k), your employer can match your contributions to a Roth 401(k). If your employer offers matching for a traditional 401(k) plan, they should match your Roth 401(k) contributions. However, employer contributions will go into a traditional 401(k) plan, which means it will be taxed at the time you withdraw it. 

Because your Roth 401(k) is part of your 401(k) plan, any contributions you make to this account will count towards your annual 401(k) contribution limit. So, if you contribute $10,000 to your Roth 401(k), you’ll only be able to contribute $10,500 to your traditional 401(k) plan because of the $20,500 limit in 2022. You can split your 401(k) contribution limit any way you wish. 

How To Aim To Maximize Your 401(k) Retirement Savings

The quarterly statements you receive regarding your 401(k) plan and contributions are often difficult to read. However, if you want to maximize your 401(k) retirement savings, you must stay on top of your contributions and limits and ensure that you’re choosing your plan’s best investments based on your goals. 

Here are some key tips to follow when maximizing your 401(k) retirement savings:

  • To handle your 401(k) strategically, you need a retirement plan in place. Think about when you plan to retire and how much you’ll need at the time of retirement to support your lifestyle. Knowing how big your nest egg needs to be and how much more you need to contribute, will help you set realistic contribution and investment goals. 
  • Define your risk tolerance before you make any decisions. Most plans offer mutual funds ranging in risk from conservative to aggressive. You need to decide what’s appropriate for your plans before making a selection and you should update your choice as your needs and goals change. 
  • Even with high risk tolerance, diversification is key to preserving and growing your retirement savings. Always diversify your investments to help offset some of the risks you take on and don’t hesitate to change or pull back your investments if you find that the risk is too great. 
  • Always read the fine print and consider the associated fees before making any selections. You should avoid funds with high fees as they’re just going to eat away at your retirement savings and set you back.
  • Never treat your 401(k) plan as a hands-off ordeal. You should be continuously monitoring your contributions, employer matches and your portfolio as a whole to check in on its performance. It’s your responsibility to re-balance your portfolio as necessary. If you’re not sure what to do, it’s important to ask a financial advisor for help. 

With these tips, you’ll be able to make the most out of your 401(k) plan. The final question most people find themselves asking is difficult to answer and that is: Just how much should you be contributing each year?

What Percent of My Salary Should I Contribute to a 401(k)?

There’s no one-size-fits-all answer when it comes to how much you should be contributing to your 401(k) plan. However, at the bare minimum, you should always max out your employer’s matching offer. For instance, if your employer is willing to match up to $10,000 per year, you should contribute at least the full $10,000 annually so that you can enjoy that benefit. After all, an employer match is a free money for retirement. 

If you’re already matching your employer’s contribution and you’re still looking for information on how much you should be putting away each year, it’s important to talk to a financial advisor who can give you personalized advice. Making the full IRS contribution limit might not be the best move for you, which is why talking to a professional about your lifestyle and goals is essential to making a wise investment.

Contact Churchill Management Group today to speak with an expert financial advisor and get one-on-one feedback on your retirement goals. Schedule your appointment today! 

FAQs

What happens if you exceed 401(k) contribution limits?

If you discover that you have exceeded the contribution limits for a given year, you need to notify the IRS by March 1. They will return excess deferrals to you by April 15. If you fail to notify the IRS, whether intentionally or accidentally, your excess contributions will be taxed at six percent each year from the time they were deposited until the time you withdraw them.  

Why are 401(k) contribution limits higher than IRA? 

401(k) contribution limits are substantially higher than IRA contribution limits, but IRAs provide more investment options, allowing you to invest in virtually any stock, bond, or mutual fund. Oftentimes, the best strategy is to have both a 401(k) and IRA to maximize retirement savings since the contribution limits for these accounts are completely separate. 

How do I calculate a Roth 401(k) contribution on my paycheck?

To calculate your Roth 401(k) withholdings, multiply your gross income per pay period by the percentage you have elected to contribute. For instance, if you earn $3,000 per paycheck and you’ve elected to contribute five percent (0.05), your Roth 401(k) withholdings are 3000*.05, or $150. 

Financial Planning Services Disclosure; Churchill provides financial planning services to Clients that specifically engage Churchill for that service. The planning can include defining goals, designing a plan, assisting with implementing the plan, and evaluating and adjusting the plan over time, at the request of the client. The financial planning includes advice regarding securities investing and may include discussions of a client’s tax, insurance, employee benefits, estate planning, and other issues. Churchill, however, does not provide legal, insurance, employee benefit, estate planning, tax, or accounting advice, and the client must rely on legal, insurance, and accounting professionals for that advice and documentation.

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