The Nuts and Bolts of a 401(k) plan

Limits on Contributions

The IRS limits contributions to 401(k) plans in three different ways:

1. Dollar Limits on Pre-Tax Contributions

The IRS places an annual dollar limit on pre-tax contributions to 401(k) plans, which is indexed for inflation. In 2016 the limit is at $18,000 (same in 2015). A catch-up contribution of $6,000 can also be made in 2016 (same in 2015) if you are at least age 50.

IMPORTANT NOTE: Check with your benefits department regarding the specifics of your plan limits.

2. Overall Limits on Contributions by You and Your Employer

The total annual contribution (including the employer matching contribution) to your 401(k) plan account and other defined contribution plans in 2016 cannot exceed 100% of your 2016 compensation or $53,000 (same in 2015), whichever is less. Your employer decides the maximum contribution you can make depending on your company's 401(k) plan.

Note that catch-up contributions are not subject to this limit. In other words, if you are over age 50, your total annual contribution in 2016 can be as high as $59,000, or 100% of your compensation, whichever is less.

Remember, in the case of any IRS limit, you can contribute only the lowest amount for which you are eligible under any of the limits.

3. Limits on Highly Compensated Employees

Regulations under the Internal Revenue Code, not your employer, may also limit the percentage of pay that highly compensated employees, generally those earning in excess of $120,000 in 2016 (same in 2015), can contribute based on the average percentage contributed by all other employees in any one year.

Even if you are a highly compensated employee, you should consider contributing the maximum you are allowed under the 401(k) plan, and explore other avenues to save for retirement.

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