The Annual Contribution Limit for 401(k) and IRA (Individual Retirement Account) plans refers to the maximum amount of money that an individual is allowed to contribute to their retirement accounts each year. The Internal Revenue Service (IRS) sets these limits, and they are subject to change annually based on inflation and other economic factors.
For 401(k) plans, which are employer-sponsored retirement savings plans, the contribution limit applies to the total amount of pre-tax, after-tax, and Roth contributions made by an employee. It does not include any employer match or profit-sharing contributions.
For IRAs, which are personal retirement savings accounts, there are separate contribution limits for Traditional and Roth IRAs. These limits apply to the combined total contributions made to both types of accounts.
Contributions above these limits can result in penalties. There are also “catch-up” contributions that allow individuals who are 50 years or older to contribute additional amounts beyond the standard limit to their retirement accounts. These contribution limits are important for retirement planning and ensuring that individuals do not exceed the legal limits, which can affect their tax situation and savings strategy.