Understanding the Annual Additions Limit helps you ensure that your total contributions- combining both employer and employee contributions- remain within the boundaries set by the IRS. This is crucial for maximising your 401(k) contributions.
Here's a simple breakdown to help you understand the concept:
- The IRS sets an overall limit on the total amount that can be added to your 401(k) account within a single plan year, considering contributions from both the employer and the individual.
- The Annual Additions Limit encompasses various components, including your Pre-Tax/Traditional deferrals, Roth Deferrals, employer contributions allocated to your account, and any forfeitures reallocated from terminated participants who were not fully vested at the time they left the plan.
- This limit is defined by IRS and is calculated as the lesser of two factors:
- 100% of your annual compensation.
- An annually adjusted dollar amount determined by the IRS. For 2021, the dollar amount was $58,000, and for 2022, it is $61,000. The dollar amount is adjusted annually to account for changes in the cost-of-living index.