TECHNICAL GLOSSARY

What Is a 401(k) Contribution?

Contributions to a 401(k) are an employee's way of saving funds for retirement through their employer's plan. Depending on the type of plan (traditional or Roth), an employer may offer its employees both pre-tax and post-tax savings options as a way to save money for retirement.
Contributing to a 401(k) is often part of an employee's employment contract. When an employee contributes to such a plan, he or she has agreed to have part of their salary paid into the 401(k) account instead of paying out to meet immediate needs. This provides an employee with a number of tax benefits and encourages them to develop a consistent habit of saving towards their retirement.

How Much Can You Contribute to a 401(k)?

The Internal Revenue Service has set dollar amounts for maximum contributions to 401(k)s each year. For 2023, the new maximum amount that you can contribute as an employee to your 401(k) is $22,500 (the prior amount that you could contribute in 2022 was $20,500). The employee dollar limit of contributions made to a single 401(k) account includes all 401(k) accounts an employee contributes to during the year.
The maximum employee contribution to 401(k)s includes the following:

• Traditional 401(k): Pre-tax salary deferral contributions
• Roth 401(k): After-tax contribution to Roth 401(k)s

If you have more than one 401(k), such as if you changed employers during the year and were contributing to more than one 401(k) during that time, then the total amount of contributions from all of your traditional 401(k) and Roth 401(k) accounts cannot exceed the IRS contribution limit for the year. Contributions made by the employee to any other type of retirement plan (for example: Traditional Individual Retirement Account and Roth Individual Retirement Account) will not affect the total contribution limitations on any of the employee's 401(k) plans.

What Is a 401(k) Retirement Plan?

Employers offer 401(k) Plans as a Retirement Benefit. They are Subject to Employer Tax Advantages as well as Employee Tax Advantages.
Most companies are S corporations, M corporations, E corporations, C corporations, sole proprietorships or other LLCs with fewer than 500 employees.
Employees can defer a designated percentage of their payroll, which is automatically invested through the plan into the designated investment selection options such as equity/mutual funds or target date funds based upon the criteria established by the employer. Then, as an example, whatever percentage of payroll has been deferred will be invested in accordance with the employer's investment credit decision without having to worry about being able to find an outside lender.