Table of Contents
Understanding a 401(k) plan
Do employer contributions affect the 401(k) contribution limit?
How to maximize 401(k) retirement savings
The bottom line
Jun 21, 2022
4 min read
Saving for retirement takes commitment and saving a lot over the years. Every dollar is a dollar the employee doesn’t have to earn and can boost savings exponentially.
A 401(k) plan is a tax-advantaged retirement saving account offered by employers that’s designed to help employees save for the future. These plans are funded through pretax earnings—taken before the money ever hits the employee’s paycheck—as well as employer contributions, if offered.
An employer may offer traditional 401(k) contributions as a benefit and, in some cases, they may offer the added benefit of a contribution match. This means that for every dollar the employee puts in their retirement savings account, the company will match some or all of it, usually up to an established maximum.
However, employees are limited in how much they can contribute to their 401(k) plans each year, per IRS guidelines. Which begs the question: If an employer adds money to their employees’ retirement accounts in any given year, does that count towards the employee’s annual contribution limit?
Businesses may choose to offer 401(k) savings plans as a retirement benefit for their employees. These plans, sponsored by the company, allow eligible employees to save and invest for their future retirement with pretax dollars.
For 2022, employees may contribute up to $20,500 into their 401(k) plan. If they are 50 or older, a catch-up contribution allows an additional $6,500 to be added, for a total 401(k) savings limit of $27,000.
The contributed dollars are invested in funds chosen by the employer, where they will be managed until the employee reaches retirement age, transfers the funds, or is otherwise eligible to make a withdrawal. Withdrawals are typically subject to income tax in the year they’re taken out and can incur a 10% penalty if taken before age 59 1/2.
In addition to the employee’s contributions, the company can also choose to add money to their employees’ retirement accounts. This is generally done as a contribution match and is often regarded as “free money” that employees don’t want to leave on the table.
With this benefit, employers offer to match whatever money the employee contributes to their 401(k) plan, up to an annual limit. An employer match may be dollar-for-dollar or based on a percentage, such as $0.50 for every $1 invested by the employee.
Let’s say an employer offers a dollar-for-dollar match up to 3% of the employee’s salary. In this case, an employee earning $50,000 per year could contribute $1,500 to their 401(k) this year and see a full employer match to the tune of another $1,500. A total of $3,000 would be added to the employee’s 401(k) that year.
However, if the employee chose to contribute $8,000 to their 401(k) that same year, their employer match would still be capped at 3% of their earnings, or $1,500. This means they would contribute a total of $9,500 to their 401(k) this year.
If both an employee and an employer contribute to a 401(k) plan, this boosts (or could effectively double) the employee’s saving efforts. But does that free money from an employer count toward one’s annual contribution limit?
In short, the answer is no. An employer’s 401(k) plan contributions don’t count toward the employee’s contribution limit. So, even if an employee younger than 50 puts $20,500 into their 401(k) one year, their employer can still contribute funds.
Still, there is a total contribution limit to note.
All plan contributions—meaning the total of elective deferrals (excluding catch-up contributions), employer match funds, employer non-elective contributions, and allocations of forfeitures—cannot surpass the IRS’s overall limit on contributions. For tax year 2022, this limit is the lesser of:
This limit is designed for employees who have more than one retirement savings account that is managed by the same employer, or a related employer.
High-earning employees may face another hurdle when it comes to salary deferrals: contribution cut-offs. While most plans will allow high-earners to continue making contributions until they reach their annual contribution limit, some will cut off contributions early if their income hits a certain threshold.
Once their income reaches the annual compensation limit ($305,000 in 2022), elective deferrals may stop if the plan requires it—even if they haven’t yet hit their contribution maximum for the year. That can impact both the employee’s annual contribution to the plan, as well as the total employer matching contributions.
Employees who utilize a workplace-sponsored retirement plan, such as a 401(k), are already on a path toward long-term saving for retirement. If an employer offers a contribution match on top of those elective deferrals, however, failing to take full advantage of this match can mean leaving money on the table.
Employees can consider adjusting their monthly 401(k) plan deferrals to maximize their annual contributions, which may ensure they receive the full match offered by their workplace.
Saving for retirement takes commitment and saving a lot over the years. Every dollar—like those offered through an employer match—is a dollar the employee doesn’t have to earn and can boost savings exponentially.
Although there are IRS contribution limits, which cap how much one can save in a 401(k) retirement plan each year, these limits don’t include employer contributions. Company contributions do count toward the total overall limit for the year, however, which is set at 100% of the employee’s compensation or $61,000 in 2022.
At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.
Get started today.
Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.
You might also like
Are 401(k) Contributions Tax Deductible?
By making elective deferral contributions to a 401(k) plan, employees will reduce their current taxable income and withholding without having to take a tax deduction.
401(k) vs. IRA: Which Should You Choose?
There are some important distinctions between 401(k)s and IRAs, that investors consider to learn how each account type would impact their retirement savings strategy.
What Is a Solo 401(k)? Retirement Account For the Self-Employed
A solo 401(k), also called a self-employed 401(k) is a tax-advantaged retirement plan with high contribution limits made available for self-employed individuals.
How to Set Up a 401(k) for Small Business Owners
A 401(k) can help a small employer attract and retain workers, while potential tax credits and deductions can defray some of the costs of setting up such a plan.
© Copyright 2023 Titan Global Capital Management USA LLC. All Rights Reserved.
Please refer to Titan's Program Brochure for important additional information. Certain investments are not suitable for all investors. Before investing, you should consider your investment objectives and any fees charged by Titan. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested, including principal. Brokerage services are provided to Titan Clients by Titan Global Technologies LLC and Apex Clearing Corporation, both registered broker-dealers and members of FINRA/SIPC. For more information, visit our disclosures page. You may check the background of these firms by visiting FINRA's BrokerCheck.
Various Registered Investment Company products (“Third Party Funds”) offered by third party fund families and investment companies are made available on the platform. Some of these Third Party Funds are offered through Titan Global Technologies LLC. Other Third Party Funds are offered to advisory clients by Titan. Before investing in such Third Party Funds you should consult the specific supplemental information available for each product. Please refer to Titan's Program Brochure for important additional information. Certain Third Party Funds that are available on Titan’s platform are interval funds. Investments in interval funds are highly speculative and subject to a lack of liquidity that is generally available in other types of investments. Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund.
The cash sweep program is made available in coordination with Apex Clearing Corporation through Titan Global Technologies LLC. Please visit www.titan.com/legal for applicable terms and conditions and important disclosures.
Cryptocurrency advisory services are provided by Titan. Cryptocurrency trading is provided by Bakkt Crypto Solutions LLC ("Bakkt Crypto"). Bakkt Crypto is not a registered broker-dealer or a member of SIPC or FINRA. Cryptocurrencies are not securities and are not FDIC or SIPC insured. Bakkt Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. Cryptocurrency execution services are provided by Bakkt Crypto (NMLS ID 1828849) through a software licensing agreement between Bakkt Crypto and Titan. Please ensure that you fully understand the risks involved before trading: bakkt.com/disclosures.
Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.
Contact Titan at email@example.com. 508 LaGuardia Place NY, NY 10012.