Knowing the historical 401k contribution limits is important for understanding how much you can really save in your 401k each year.
When most of us think about how much we can contribute to our 401(k), we only think about how much we can contribute as an employee. Instead, think also about how much an employer can contribute to your 401(k) through company profit sharing.
For 2022, an employee can contribute a maximum of $20,500 to their 401(k), up from $19,500 in 2021. The 401(k) contribution limit will likely go up by $500 every two years based on history. I really hope everyone maxes out this year and every year for the rest of their working careers.
The employer 401(k) contribution limit, on the other hand, is a hefty $40,500 for 2022. In other words, an employer, through profit sharing or 401(k) matching, can contribute much more than an employee. The total 401k contribution limit in 2022 is, therefore, $61,000, up from $58,000 in 2021.
The next time you look for a new job, make sure to inquire what the employer 401k match or profit sharing plan is. Retirement benefits can really add up over time!
Generous 401(k) Profit Sharing With My Previous Employer
Yes, some of us get paltry company 401(k) matches up to a certain percent of income or up to a particular absolute dollar limit. But for the most part, we’re left fighting for our own retirement well-being since the pension system is going the way of the dinosaur.
The reality is an employer can contribute a heck of a lot more than 3% of your salary or whatever their company match may be. They just need to have the profits and the desire to do so!
After about the fifth year at the firm I retired from, I started receiving “profit sharing.” This was on top of my $5,000 401k company match. I always maxed out my 401k while I was there from 2001 – 2012. During good times, such profit sharing bumped up my overall company 401k match to $25,000 during some years. Ah, those were the good old days.
For those of you who are employed, I suggest familiarizing yourself with your company’s pre-tax retirement savings programs ASAP. You might be leaving free money on the table.
For those of you looking to join a new firm, inquire about their retirement savings program. It could be worth a fortune over time. Let’s look at the historical 401(k) contribution limits over time.
Historical 401k Contribution Limits
The following is a chart I put together on the historical 401k contribution limits. They are the same for those of you with 403b plans, and most 457 plans. The 401k was first enacted into law in 1978, but didn’t gain popularity until around the mid-1980s.
As you can see from the historical 401k contributions limit chart, your employer has the ability to contribute $40,500 to your 401k for a total pre-tax contribution of $61,000 for 2022. Again, the 401(k) contribution limit will likely go up by $500 every year or two.
Great employers tend to also make great profits and want to attract and retain the best people. Profit sharing is one of the biggest benefits of working at a blue chip company.
For those of you working at startups, know that you are not only foregoing a higher salary working at an established firm, you’re also foregoing potentially hundreds of thousands of dollars in employer profit sharing as well.
Given most startups are loss-making or barely profitable, many don’t even offer any 401k matching, if they have a 401k plan at all. Therefore, please be fully aware of all your company benefits before making a decision. That equity component best be worth something!
401(k) Income Limits
For 2022, the IRS limits the amount of compensation eligible for 401(k) contributions to $305,000, up from $290,000 in 2021. The IRS adjusts this limit every year based on changes to the cost of living.
It’s an important distinction that the limit is based on total compensation, which includes employer contributions to a 401(k) plan, and not just salary.
This income limit doesn’t mean anyone making over $305,000 in 2022 is ineligible to contribute. It only means any amount of compensation above the limit isn’t eligible for contribution. You can still max out your 401(k) if you want to.
Employees making more than the limit can still contribute the maximum salary deferral to their employer’s 401(k) plan. However, the employer’s matching contribution will apply only up to the limit.
For example, if you’re paid $500,000 and your employer also offers a 5% match on your 401(k) salary deferrals, you can contribute $20,500 in 2022. Your employer match will only be $15,250, though, instead of the full $20,500. That’s because it’s limited by the $305,000 compensation limit for 2022. Even though 5% of $500,000 is $25,000, 5% of $305,000 is only $15,250.
Highly Compensated Employees
There are additional contribution restrictions for highly compensated employees as defined by the IRS and your 401(k) plan.
A highly compensated employee (HCE) meets at least one of these qualifications:
- They owned more than 5% of the business sponsoring the plan at any point during the past year. This 5% ownership is based on individual holdings, plus those of immediate family members and grandchildren working for the company.
- They make more than the annual compensation limit designated by the IRS. The limit for 2022 is $135,000. The 401(k) plan may also specify that the individual must be in the top 20% of employees when it comes to compensation.
In order for a plan to remain compliant with ERISA, HCEs cannot contribute more than 2% more of their salary than non-HCEs. So if the average non-HCE contributes only 5%, the HCE group cannot contribute more than 7% of their combined salary.
This can make planning contributions extremely difficult since the limit is based on other employees’ contributions and compensation. And, if you don’t make a contribution in the calendar year, you lose the opportunity to do so even though you won’t find out your actual contribution limit until the early part of the next year.
401(k) Savings Potential By Age
The 401k should just be only one leg to a modern day four-legged retirement plan. The other three legs include: social security, after-tax stock and bond investments, and real estate.
Your estimated social security check should be discounted by 30% because the program is underfunded by 30%. Your after-tax stock and bond portfolio should try to match the amount you accumulate in your 401(k). Finally, it’s a good idea to at least get neutral real estate by owning your primary residence due to inflation.
After listening to more feedback from the community, I’ve updated my 401(k) savings potential by age for the new decade. It’s now broken up into three columns. This is because maximum 401(k) contribution limits were lower in the past. Further, everybody reading this article is a different age.
Older savers are defined as those of you over 45. Middle age savers are defined as those of you between 30 – 45. Younger savers are defined as those of you under 30-years-old.
You can also look at the columns in terms of performance, too. Some of you will inevitably invest better than others. As a result, you may have $2,000,000 in your 401(k) on the high end instead of just $500,000 at age 50. Meanwhile, some of you may work for more generous employers who share more of their profits with you.
The low-to-high end amounts by age should encapsulate 80% of you who’ve consistently maxed out your 401(k) contributions every year you’ve been employed. If you want, you can use the table as a guide for your total savings by age.
401(k) Contributions Should Be An Afterthought
Once you’ve decided to max out your 401(k), there’s nothing more you can do except be a loyal employee. You’ve got no control over how much your company contributes. But we can assume there is a correlation between the length you are at your firm and the amount of benefits you will receive.
There’s a real issue today where employees job hop like children afflicted with attention deficit disorder. Can you blame employers for creating a vesting period or delaying their 401k profit sharing until after a certain number of years?
Your goal as a financial freedom seeker is to control what you can control. Actively work to bolster your income to your maximum potential. Then aggressively build an after-tax investment portfolio that spits of gross passive income. This way, you don’t have to wait until you are 59.5 to withdraw money.
Once you have a robust after-tax investment portfolio, you gain the option to retire early. You can also become an entrepreneur or travel the world. In my case, I’ve used my passive income to be a stay at home dad full-time. So far, it’s been a great experience.
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Build Wealth And Earn Income With Real Estate
Contributing to a 401k is a must. However, to retire before 59.5, you must build a steady stream of passive income to live off. Real estate is my favorite asset class to build wealth. It is a tangible asset that is less volatile, provides utility, and generates income.
In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. With interest rates down, the value of cash flow is up. Further, the pandemic has made working from home more common.
Take a look at my two favorite real estate crowdfunding platforms. Both are free to sign up and explore.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the way to go.
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Historical 401(k) Contribution Limits is a Financial Samurai original post. I’ve been helping people financial independence since 2009.