401(k) & 403(b) Contributions
401(k) & 403(b) Contributions
401(k) and 403(b) plans offer employees an opportunity to accumulate assets that can later be used to provide a stable standard of living and financial security during retirement. However, not all 401(k) and 403(b) plans are created equal, as employers design retirement plans based on their needs, goals, and philosophies. Your retirement account through your employer can be funded by you, your employer, or both.
Employee Contributions
401(k) and 403(b) plans are defined contribution plans where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan. You choose a percentage or dollar amount of your salary you want to put away and your employer deducts it from your paycheck each payroll.
Salary reduction/elective deferral contributions
These salary deferral contributions are tax-deferred, meaning that the contributions are exempt from federal income tax during the year in which you make the contribution. Additionally, the earnings are not subject to income taxation until such time as you receive a distribution from the plan.
Roth after-tax contributions
These salary deferral contributions are tax-deferred, meaning that the contributions are exempt from federal income tax during the year in which you make the contribution. Additionally, the earnings are not subject to income taxation until such time as you receive a distribution from the plan.
Rollover contributions
A rollover occurs when you transfer your retirement account to your new employer or an IRA. When you roll over a retirement plan distribution, you generally don’t pay tax on it until you withdraw it from the new plan. By rolling over, you’re saving for your future and your money continues to grow tax-deferred. If you don’t roll over your payment, it will be taxable (other than qualified Roth distributions and any amounts already taxed) and you may also be subject to additional tax unless you’re eligible for one of the exceptions to the 10% additional tax on early distributions.
Employer Contributions
401(k) and 403(b) plans allow your employer to make contributions on your behalf. The employer can make matching contributions or other discretionary contributions.
Employer matching contributions
If the 401(k) or 403(b) allows, your employer can make matching contributions for an employee who contributes elective deferrals (for example, 50 cents for each dollar deferred). Employer matching contributions can be discretionary (contributed in some years and not in others, depending on the company’s decision) or mandatory.
Employer discretionary or non-elective contributions
If the plan document permits, your employer can make contributions other than matching contributions. These contributions are made on behalf of all employees who are plan eligible, including employees who choose not to contribute elective deferrals.
Contribution Limits
Retirement plans are governed by Internal Revenue Service (IRS), who limits how much you and your employer can put away into a 401(k) or 403(b) plan each year.
Employee contribution limit
Section 402(g) of the Internal Revenue Code limits the amount of income you may elect to defer under all employer-sponsored retirement plans during a tax year (for most employees, a tax year is January 1 through December 31.) The elective deferral limit for 2020 is $19,500. Age 50 and older? You may be allowed to contribute an additional “catch-up” contributions, up to $6,500 for 2020.
Total contribution limit
Internal Revenue Code Section 415(c) provides that the total of employee contributions (other than the Age 50+ Catch-up), employer contributions, and forfeitures allocated to your 401(k) or 403(b) account within the 12-month period is capped at 100% compensation up to a stated dollar amount determined each year by the IRS. In 2020, the dollar limit is $57,000 and is subject to annual cost of living adjustments in $1,000 increments.