Understanding the Maximum Safe Harbor Contribution to a 401k Plan

The safe harbor contributions to a 401k plan can vary significantly depending on the eligibility criteria and an individual's age. Understanding these limits is crucial for maximizing your retirement savings. In this article, we will focus on the maximum safe harbor contribution for the 2020 tax year, along with important considerations for catch-up contributions.

Personal Deferral Contribution Limits

For the 2020 tax year, the maximum amount an employee may defer into a 401k plan is $19,500. This limit is subject to change each year, and for 2020, the limit has been set. However, for individuals aged 50 or above, there is an additional catch-up contribution of $6,500. This makes the total contribution limit for 50 individuals $26,000.

It's important to note that employers may also contribute to 401k plans, which can further increase the total contribution limit. For instance, an employer might contribute an additional $37,500 (typical profit sharing contribution), making the total for a 50 individual up to $57,000 or $63,500 in the case of additional catch-up contributions.

The 57,000 Limit Explained

The $57,000 limit is the combined total of an individual’s personal contributions and the maximum possible employer contributions. If an employer contributes the maximum amount ($37,500) in a 401k plan, an individual who is 50 years of age or older can defer $26,000. This brings the total limit to $63,500.

Multiple 401k Plans

Employees who are part of multiple 401k plans could theoretically max out their contributions in each plan. However, the total reported limit for individual contributions is still $57,000, or $63,500 for individuals aged 50 or older. The $57,000 is a per-plan limit, meaning an individual could contribute the maximum $37,500 (plus $6,500 catch-up) in one plan and the other $57,000 in another plan.

Pay Limits and Reporting

There is also a limitation based on an individual's pay. Regardless of the number of 401k plans, the maximum contribution cannot exceed 100% of an individual's compensation. For instance, if an individual is paid $40,000 in salary, the total contributions to all 401k plans cannot exceed 40% of their salary unless specific plan provisions allow for higher limits.

Essential Resources

To stay informed about the most current contribution limits, the IRS provides a comprehensive resource on its website. You can visit IRS.gov and search for the specific page: 'Retirement Topics - 401k and Profit-Sharing Plan Contribution Limits'. This page will guide you on how to check the latest limits for any upcoming tax year.

For those aged 50 or above, additional catch-up contributions are available. These limits vary each year, so it's essential to stay updated with the latest information from the IRS.

By understanding these limits, employees can make the most of their retirement savings opportunities. Proper planning can ensure that you are on track to achieve your retirement goals.