What Is the Maximum 401(k) Contribution?

December 16, 2019 · 6 minute read

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What Is the Maximum 401(k) Contribution?

It’s always a good time to save for retirement. In 2020, with 401(k) employee contribution limits jumping to $19,500, up from $19,000 in 2019, you have the opportunity to supercharge your savings, which could ultimately help you get closer to your retirement goals.

How Do 401(k)s Work?

The U.S. government wants you to save for retirement, so they’ve come up with savings vehicles—such as 401(k)s and IRAs—that receive special tax treatment to encourage you do so.

When you open and fund a 401(k), the money you contribute up to the 401(k) limit is deductible from your taxable income in the year you make the contribution.

That money can then be invested and grow tax-deferred inside your 401(k) account. You don’t pay any taxes on the money until you withdraw it when you’re 59½, at which point it’s subject to regular income taxes.

You might want to be careful when making withdrawals or borrowing from your 401(k). Withdrawals made before age 59½, may be subject to income tax and a 10% early withdrawal penalty.

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

The government limits the amount you can contribute to your 401(k) in an effort to level the playing field and to keep wealthy individuals from being able to save more than the average worker.

Since contributions are made with pre-tax dollars, wealthy individuals can’t use them as a way to defer large amounts of their taxable income as a result of these limits.

There are three limits to your 401(k) contributions that you might want to be aware of:

Elective deferrals: First, the elective deferral limit is the amount you, the owner of the 401(k), can contribute. For 2020, you can contribute $19,500 , up from $19,000 in 2019.

Catch-up contributions: If you are over the age of 50, your retirement contribution limit increases. The 401(k) catch-up contribution lets you fill in gaps in your retirement savings as you get closer to retirement and have less time to save. In 2020, you can make up to $6,500 in catch-up contributions , up from just $6,000 in 2019

Employer contributions: Finally, your employer can make contributions and matching contributions to your 401(k) in addition to the funds you contribute. Matching funds may be based on the amount you choose to defer yourself.

For example, your employer might offer you matching funds if you defer 5% or more of your salary, as an incentive to get you to save. It’s a good idea to save at least the minimum to receive an employer’s match. If you don’t, you could be throwing away free money. In 2019, Your employer can contribute up to $37,000, depending on your income.

The total amount of your 401(k) contributions—including elective deferrals and employer contributions—cannot exceed 100% of your income or $56,000 in 2019 , whichever is lower. With catch-up contributions, that number jumps to $62,000.

What Happens If You Go Over the 401(k) Limit?

Figuring out how much you want to contribute to your 401(k) can be tricky. Adding to the stress, you’re not allowed to go over the contribution limits or you may face penalties .

Contributions to your 401(k) are withheld from your monthly paycheck. Typically you have to decide how much you want to defer each month as a percentage of your gross income. If your income changes during the year, so too will the amount that you are saving.

So if your goal is to save the full $19,500 allowed in 2020 for elective deferrals and you’re lucky enough to get a raise during the year, you might inadvertently get bumped over the contribution limits. You could avoid this scenario by changing how much you defer when your income increases.

However, if you space out and forget to change your percentage, it’s not a big deal. You have until April 15 , or tax day, to ask your plan to return any excess contributions. This distribution is not subject to the 10% early withdrawal penalties usually levied against early distributions.

You might want to ensure excess contributions are returned before tax day, however. If you don’t, excess deferrals left in the plan may be taxed twice—once when they’re contributed and again when they’re distributed in the new tax year.

In some cases, leaving the excess in your plan can disqualify your 401(k), and you’ll have to pay taxes immediately on vested contributions.

You could check with your plan rules. Your plan may actually have an automatic cut-off that requires contributions to cease when you hit your contribution limit, keeping you from going over.

It’s possible that you hold multiple 401(k) accounts, such as a traditional 401(k) and a Roth 401(k). Note that contribution limits are placed on the total amount that you hold in all of your accounts. They do not apply to accounts individually.

Other Related Retirement Accounts

In addition to traditional 401(k)s, there are other types of individual retirement accounts that qualify for tax deferment, such as IRAs, that you may encounter. Here’s a look at other employer-offered retirement accounts that may function with slightly different rules and contribution limits.

•   Roth 401(k): Employee contribution limits for Roth 401(k)s are $19,500 in 2020, the same as traditional 401(k)s. The main difference between a traditional and Roth 401(k) is that contributions are made after-tax. Money grows inside the account tax-free and is not subject to income tax when you withdraw it.
•   403(b): A 403(b) plan is a tax-advantaged retirement savings plan that’s available to workers in public education, nonprofits, cooperative hospitals, and self-employed ministers. Contribution limits for these accounts are also $19,500.
•   SIMPLE 401(k): These plans are built for small businesses with 100 employees or fewer. Unlike with a regular 401(k) plan, employers must make a matching contribution of 3% or a non-elective contribution of 2% for their employees. Employee elective deferrals are limited to $13,500 in 2020, up from $13,000 in 2019 .
•   Solo 401(k): Also known as one-participant, or self-directed 401(k)s, solo 401(k)s cover small business owners who have no employees other than themselves and their spouse. These plans allow elective deferrals up to $19,500. Non-elective contributions can be made of up to 25% of compensation. Your total contributions cannot exceed $56,000. If you’re self-employed, you have to make a special calculation to determine the maximum elective and non-elective deferrals you can make. Instructions for this calculation can be found in IRS Publication 560 .

Asking for Help

The rules for retirement accounts are complex. To make matters more complicated, some rules, like contribution limits, change relatively frequently.

Luckily, there are a lot of resources you can turn to for help if you get confused or are looking for some tips.

Your human resources department could be a great place to start when trying to figure out the specifics of your plan. You could turn to them to help you set how much you want to defer. And if you make any mistakes, like over-contributing to your account, they might help you right those wrongs.

When you invest with SoFi you have access to financial advisors at no cost to discuss big picture financial goals that can include saving for retirement. You can also talk to them about different investment options your retirement accounts offers, so you could choose the option that makes the most sense for you.

Learn more about building a wealth plan through investing to help achieve goals like saving for retirement with SoFi Invest®.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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