401k Contribution Limits And Rules For 2013

In the past few years I haven’t really contributed to my company’s 401(k) plan because my company doesn’t really do any matching contributions.  Because of that, and the fact that the company’s plan wasn’t a very good one (high costs, etc), I avoided it altogether.  This past year the company switched plans to a new company, and their investing options were a lot better.  Last year I was able to max out my  Roth IRA contributions in our account at Betterment.com, and then decided to try and max out my Roth 401(k) and 401(k) contributions for the year.

This year’s combined max contribution to the 401k of both types is $17,000, and I thought I’d be able to max it out. In the intervening months, however, we decided we wanted to move, and at that time we stopped our retirement contributions for a short while to stockpile cash for a down payment.

Even though we won’t be maxing out our contributions this year, I thought it might be a good idea to do a quick review of what the 401k contribution limits, rules and regulations will be for 2013.

While the IRS hasn’t released guidance yet as to what the new limits will be, plenty of folks have extrapolated what they believe the limits will be for next year. If they turn out to be wrong, we’ll come back and update this post at that time, which should be later this month.

UPDATE: The IRS released their 401k contribution guidelines today, and the max contribution did in fact increase to $17,500.

The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $17,000 to $17,500.

Looking for the 2013 Roth IRA Changes? Click here.

401(k) Background

First things first.  What is a 401(k) account, where did it originate? From Wikipedia:

A 401(k) is a type of retirement savings account in the United States, which takes its name from subsection 401(k) of the Internal Revenue Code. 401(k)s were first widely adopted as retirement plans for American workers, beginning in the 1980s. The 401(k) emerged as an alternative to the traditional retirement pension, which was paid by employers. Employer contributions with the 401(k) can vary, but in general the 401(k) had the effect of shifting the burden for retirement savings to workers themselves. In 2011, about 60% of American households nearing retirement age have 401(k)-type accounts.

401(k) Contribution Limits

When you contribute to a 401(k) it will have contribution limits beyond which you can’t contribute for that year. The 401k contribution limits will increase this year due to an increase in the consumer price index. The following table will show the maximum yearly contribution for the 401k account type every year since 2007.

For the past 7 years have seen an increase of $2000 in the 401(k) contribution limits.

Contribution Limits For 401(k) – Your Employer

An employer can contribute to an employee’s 401(k) plan as well, and if yours is offering to do that, take it!  Your employer will often contribute a percentage match, for example, contributing 50% of your contribution, up to the first 6% of your salary.

Certain employers will also cap how much you can contribute to the company’s 401k plan.  If you are a highly compensated employee (HCE), making above $115,000 in 2012, you might be subject to additional limits in your company’s 401(k).  The rules get a bit complicated, and the rules are essentially there in order to encourage more 401(k) plan participation by less highly paid employees, but because of them often a company will not allow HCE to contribute more than a certain percentage of their income.

All this is to say, check with your company’s 401(k) plan administrator for your own plan’s limits, which may be different from the government limits.

401(k) Catch-Up Contribution Limits For Those 50+

If you are at or over the age of 50 by the end of the 2013 tax year, and your plan allows it, you can make a catch up contribution to your 401(k) plan.

There is no increase this year of catch up contribution limits, so it will remain at $5500.

If Your Employer Contributes, Does That Affect Your Limit?

One source of some confusion for people is whether their employer’s contributions to their 401(k) will affect their own contribution limits. In other words, will their limit of $17,500 be affected by their employer’s contribution to their account.   In short, it won’t affect the employee’s limit.  The limits for employer and employee contributions are separate, and don’t affect each other.  That’s good news because it means you can contribute more if your employer is making contributions for you!

Example: If someone makes $100,000 in pre-tax compensation,  and their employer will contribute 50% of the first 6% , they could have $17,500 contributed by the employee, and $3,000 by the employer for a total of $20,500. If they’re over 50 they could also make catch up contributions for a total of $26,000.

Final Things To Look At

A couple more things to consider when looking at 401(k) plans for 2013.  First, the maximum contribution to a 401(k) plan when taking into account employee contributions, employer matching and other contributions is $50,000 or 100% of their compensation, whichever is less.  Hopefully I’ll be in a position some day to be putting in and receiving that kind of a contribution!

Do you contribute to a 401(k)?  Do you expect to reach the max contribution next year?