Each year the IRS lays out rules that determine the maximum contribution an individual may contribute to a 401(k). Generally, the IRS adjusts this amount with inflation, and these 401k contribution limits and withdrawal rules are changing both in the years 2019 and 2018. This is important because 401k’s, along with Roth IRAs, are the most popular retirement savings plans.
Employees determine the percentage of their gross salary they wish to contribute to their account, and during the payroll cycle each pay period, that percentage is placed into the employee’s personal 401k account. Understanding the maximum contribution limits will greatly influence the investment choices each employee makes. Unlike contribution rules for SEP IRAs, certain 401k rules in 2019 and 2018 apply to all retirement plans, including: participant eligibility and withdrawal rules.
These elective deferrals limits are also based on age. One set of rules for those under age 50, and another set of rules for those 50 and over.
For those under 50, the maximum limit of elective deferrals in 2019 is nineteen thousand dollars. For 2018 the IRS contribution limit was eighteen thousand five hundred dollars.
For those who turn 50 or over in the tax year in question, the IRS allows for catch-up contributions. You can only make catch-up contributions to your 401k if you plan allows for it. For 2019 this limit raises your maximum contribution by six thousand dollars. So for the year 2018, the total catch-up election deferral for those 50 and older was twenty-four thousand five hundred dollars. The max in 2019 is twenty-five thousand dollars. As we said, these limits are based on your individual plan rules.
These are the regulations that apply to safe harbor or traditional 401k plans. If you have a SIMPLE 401(k), then different rules apply (not to be confused with Simple IRA limits.) These limits are much lower than traditional 401k contributions. For 2019, the maximum you can add to a SIMPLE 401k is thirteen thousand dollars. In 2018, this was also twelve thousand five hundred dollars. These are subject to the same cost-of-living adjustments in future years.
Catch-up contributions for those 50 and over are also considerably less for those who participate in a SIMPLE 401k. The catch-up contribution allows you to add three thousand dollars to the deferral. This means your total electives for 2019 must not exceed sixteen thousand dollars, and for 2018 the ceiling for this amount is fifteen thousand five hundred dollars.
Be sure you know your 401k deadlines. It’s important to note that these are universal contribution limits, but your specific plan may have its own requirements which limits the amount of salary you can defer.
Notes about Early Withdrawal
You may make early withdrawals from your 401k, but this will be considered taxable income. If you make the early withdrawal before reaching age 59 1/2, then an additional ten percent penalty tax will be applied. The 59 1/2 age limit doesn’t apply if you retire early and are at least 55 years old. It also doesn’t apply under certain circumstances such as death, becoming disabled and certain hardship circumstances.
Certain events are considered hardships and covered by special rules under the IRS code, including: medical expenses, damage to primary residence, educational expenses, and funeral expenses. At the age of 70½ years or when employment ends, the retiree is required to begin drawing funds and paying tax on the withdrawals.
Contact your financial adviser for assistance in evaluating the participating funds within the 401k where your distribution will be invested. Guessing at where to invest your money is not the way to optimize your returns. Market ups and downs can add unnecessary worry about long-term investments. Monitor the performance of your 401k on a semi-annual basis, but do not watch it too closely each quarter.
This chart covers the maximum elective deferrals for traditional or safe harbor 401k plans.
| Date | Contribution Limit Under 50 | Contribution Limit 50 and over | Deadline | ||
| 2019 | $19,000 | $25,000 | 04/15/2020 (extensions apply) | ||
| 2018 | $18,500 | $24,500 | 04/15/2019 (extensions apply) | ||
| You must establish your 401k account by December 31. | |||||
This chart covers the maximum elective deferrals for SIMPLE 401(k) plans.
| Date | Contribution Limit Under 50 | Contribution Limit 50 and over | Deadline | ||
| 2019 | $13,000 | $16,000 | 04/15/2020 (extensions apply) | ||
| 2018 | $12,500 | $15,500 | 04/15/2019 (extensions apply) | ||
| You must establish your 401k account by December 31. | |||||
Additional limits. There are other limits that restrict contributions made on your behalf. In addition to the limit on elective deferrals, annual contributions to all of your accounts – this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures to your accounts – may not exceed the lesser of 100% of your compensation or $56,000 for 2019 ($62,000 including catch-up contributions) and $55,000 for 2018 ($61,000 including catch-up contributions). In addition, the amount of your compensation that can be taken into account when determining employer and employee contributions is limited. The compensation limitation is $280,000 for 2019 and $275,000 for 2018.
