401(k) Contribution Limits in 2018-19

Whether you are nearing retirement or just starting your career, it's always the right time to begin planning for your financial future. If your employer offers a 401(k), it can be one of the simplest and most effective ways to save for your retirement. While the chief advantage of a 401(k) plan is that it allows you to defer a portion of your paycheck to your retirement account each month automatically, there are some limitations on how much you can save.

Each year, usually in October or November, the Internal Revenue Service (IRS) reviews and sometimes updates the maximum contribution limits for 401(k), individual retirement accounts (IRAs) and other retirement savings vehicles. Depending on your age and compensation level, you may be subject to different limits. Stay up-to-date on the most current regulations to ensure you make the most of your employer-sponsored plan.

The basic employee contribution limit for 2019 is $19,000, up from $18,500 in 2018. The $19,000 limit includes all elective employee salary deferrals, as well as any after-tax contributions made to a designated Roth account within your 401(k). This contribution limit applies to 401(k), 403(b), and most 457 plans, as well as the federal government’s Thrift Savings Plan. 

If you hold multiple 401(k) accounts, your total contributions to all 401(k) accounts – both Roth and traditional – cannot exceed $19,000 for 2019. Any contributions you make to other types of retirement accounts, such as IRAs, do not affect your 401(k) contribution limit.

To encourage those nearing retirement to accelerate their savings, the IRS allows 401(k) participants were age 50 or older to make additional contributions once they have maximized the standard contribution limit. If you are age 50 or older and have already contributed the maximum amount to your 401(k) during the current year, you may make an additional $6,000 catch-up contribution. This is unchanged from 2018.

One of the chief benefits of participating in a 401(k) plan is the opportunity to take advantage of employer contributions. Like employee contributions, employer contributions are capped, but at a much higher level. The limit on employer contributions in 2019 is $37,000 (up by $500 from 2018) subject to the overall limit on total contributions discussed below. Employer contributions include any employer matching of employee contributions, as well as any additional elective employer contributions made regardless of employee participation. 

While the IRS encourages participation in 401(k) retirement savings plans for employees of all compensation levels, it imposes caps on the total amount that can be contributed in any given year, regardless of income. For 2019, the maximum allowable contribution to a 401(k) account – including employee salary deferrals and after-tax Roth contributions, as well as employer matching and elective contributions – is $56,000, or 100% of employee compensation, whichever is lower. This is up $1,000 from 2018. With a $6,000 catch-up contribution, the maximum yearly contribution for 401(k) participants age 50 or older is $62,000 for 2019 (up by $1,000 from 2018). 

Your contributions are still limited by the employee contribution limits discussed above, however. If you were under 50 and earned $60,000 in 2018, for example, you were still only allowed to contribute $18,500 for that year, and the remaining balance of allowable contributions must come from your employer. If your employer only contributes $20,000, then your total annual contributions are effectively capped at $38,500 instead of at the $55,000 limit in 2018.

But If you are age 50 or older and and make full use of the catch-up contribution limits, you can max out your 401(k) ($25,000) and an IRA ($7,000). This lets you sock away $32,000 a year in 2019.

If you earn a very high salary, you may be considered a highly compensated employee (HCE), subject to more stringent contribution limits. To prevent wealthier employees from benefiting unfairly from the tax benefits of 401(k) plans, the IRS uses the actual deferral percentage (ADP) test to ensure that employees of all compensation levels participate proportionately in their companies' plans. If non-highly compensated employees (NHCEs) do not participate in the company plan, the amount that HCEs can contribute may be restricted.

This chart from the Society for Human Resource Management (SHRM) clarifies what's available for defined-contribution plans (401(k), 403(b) and most 457 plans) in 2019.

Source: IRS Notice 2018-83