A 401(k) plan is a company-sponsored retirement account in which employees can contribute income and where employers may match contributions. It's important to understand the different ways to contribute to your 401(k). There are two basic types of 401(k)s:
- Traditional 401(k) contributions
- Roth 401(k) feature
What are the differences between a Traditional and a Roth 401(k)?
The main distinction between both is the tax benefits:
- Traditional 401(k) contributions are made on a pre-tax basis and individuals pay income tax on the amounts withdrawn once they retire.
- Roth 401(k) feature allows for the contribution of after-tax dollars. The elected amount is deducted from your paycheck after income, Social Security, and other applicable taxes are withheld.
Learn more about the differences between Roth and Traditional Contributions.
How does money get deposited into my 401(k) plan?
After you reach your plan's eligibility rules, there are two main ways that money gets contributed to your account:
Via your Paycheck
Once you have selected the amount you would like to contribute to your 401(k) account, that percentage of the dollar amount is deducted from each paycheck during the payroll period.
Via your Employers Contributions
Some plans have an "employer match" which means your employer will contribute to your account based on how much you contribute, up to certain limits established by the IRS or your plan document.
Via Rollover Contribution
See details below about Rollover Contributions.
What are the Contribution Limits for a 401(k)?
For 2022, the limit to contribute to a 401(k) annually is $20,500 (indexed each year for inflation) regardless of whether the funds are a pre-tax or Roth contribution (up from $19,500 in 2021). However, participants aged 50 years or older may contribute up to $27,000 annually.
$20,500 is the limit you can contribute from your own paycheck. If your plan offers an employer match, the amount of your employer’s contribution is in addition to your own contribution
For 2023, the limit to contribute to a 401(k)annually is $22,500 (indexed each year for inflation) regardless of whether the funds are a pre-tax or Roth contribution (an increase from $20,500 in 2022). However, participants aged 50 years or older may contribute up to $30,000 annually.
$22,500 is the limit you can contribute from your own paycheck. If your plan offers an employer match, the amount of your employer's contribution is in addition to your own contribution.
Learn more about 401(k) Contribution Limits.
How much should I contribute?
The amount you save depends on your personal financial situation. The decision you make should be based on your other investments, your risk tolerance, and how much income you think you will need during retirement. The most important thing is that you start saving now. Learn more about How Much to Contribute.
What is a Rollover Contribution?
A rollover contribution refers to the funds you have moved from your previous employer’s retirement account or another qualified plan into your new employer’s retirement account. If your plan accepts rollover funds, you can consolidate your retirement accounts by transferring assets from those other accounts. Learn all about Rollover Contributions through our help center article:
- How to Request a Rollover Into My Vestwell Account
- How Do I Request a Rollover Into My Vestwell Account from a Simple IRA
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