A 401(k) plan is a company-sponsored retirement account where employees can contribute income, and employers may match contributions. Understanding the different ways to contribute to your 401(k) is important. There are two basic types of 401(k)s:
- Traditional Contributions
- Roth Contributions
What Are the Differences Between Traditional and Roth Contributions?
- Traditional 401(k) contributions are made on a pre-tax basis, and individuals pay income tax on the amounts withdrawn once they retire.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) contributions allow 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.
You can 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 funds get 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 your salary is deducted from each paycheck during the payroll period.
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Via Your Employer 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.
Note: Starter 401(k)s are a specific type of 401(k) that Congress introduced in the SECURE Act 2.0 of 2022. Though similar to traditional 401(k)s, Starter 401(k)s do not permit employer contributions. - Via Rollover Contribution - Please take a look at the details below about rollover contributions.
What Are The Contribution Limits for a 401(k)?
For 2024, the limit to contribute to a 401(k) annually is $23,000 (indexed each year for inflation), regardless of whether the funds are a pre-tax or Roth contribution (up from $22,500 in 2023). However, participants aged 50 years or older may contribute up to $30,500 annually.
$23,000 is the limit you can contribute from your paycheck. If your plan offers an employer match, the amount of your employer’s contribution is in addition to your contribution.
You can learn more about 401(k) Contribution Limits.
Note: Starter 401(k)s are a specific type of 401(k) that Congress introduced in the SECURE Act 2.0 of 2022. Though similar to traditional 401(k)s, some key differences include lower employee contribution limits. For 2024, employees can contribute up to $6,000, with an additional $1,000 catch-up contribution allowed for those aged 50 and older.
How Much Should I Contribute?
The amount you save depends on your financial situation. Your decision 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 here.
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 the following help center articles:
- How to Request a Rollover Into My Vestwell Account
- How Do I Request a Rollover Into My Vestwell Account from a Simple IRA
We hope this information is helpful. If you would like further assistance, please contact us at help@vestwell.com.