Can I Contribute My Full Salary to My 401k?

When considering how much you can contribute to your 401k, many factors come into play. While the idea of capping your salary contributions at 100% may seem like a great way to boost your retirement savings, itrsquo;s important to understand the constraints set by legal limits, plan rules, and financial realities.

Plan Limits and IRS Regulations

The maximum you can contribute to a 401k plan each year is governed by the Internal Revenue Service (IRS). For the 2023 tax year, the annual limit for employee contributions is $22,500, and it increases to $30,000 if you are 50 years or older. However, some plans may have their own lower limits. Itrsquo;s crucial to check your specific plan details to ensure you are within these bounds.

Employer Match and Contribution Caps

Many employers offer a matching contribution to encourage employees to save in their 401k plans. The total amount you and your employer contribute cannot exceed the annual IRS limit. For 2023, the cap on total contributions, including the employer match, is $66,000 for individuals under 50 and $73,500 for those 50 and older. This means that even if you want to contribute 100% of your salary, your employerrsquo;s match might push you over the limit.

Financial Constraints and Living Expenses

Your personal financial circumstances also play a significant role. A high salary contribution might not be feasible if your living expenses are high. Employers often have rules that restrict the percentage of salary that can be converted to 401k contributions. It is advisable to discuss your situation with HR or plan administrators to understand what is and isnrsquo;t possible within your specific plan.

Special Considerations for Self-Employed Individuals

For self-employed individuals, contributing to a 401k is a bit different. You donrsquo;t use salary reductions but make equivalent contributions to your plan. Any contributions you make are tax-deductible as contributions to a qualified plan. The measurement used to determine your plan contributions is your earned income, which is calculated after deducting any deductible contributions.

If you were to contribute 100% of your self-employment income to a 401k, your earned income would be zero (since contributions reduce your income). Therefore, the maximum contribution you could make would be limited to half of your net earnings or the applicable dollar limit, whichever is lower. This is due to the fact that contributions are capped at $22,500 for general contributors and $30,000 for those 50 and older, as of 2023.

In addition, FICA (Federal Insurance Contributions Act) and state withholding requirements must also be considered. These withholdings must be deducted from your total income. This means that if you try to defer your full paycheck, the amount you would actually defer would be after these deductions.