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401K contribution limit is really $55k

Ideally, we should strive to maximize our 401k contributions, but what does this really mean and how can we do it? All of us are told about the employee contribution limits, which is $18K right now, but since many of us are not able to reach this limit with our contributions, we do not notice what happens with the employer match. The rules are different for employers, here are some ways to you can beat the $18K limit.

The simplest is to crank up your contribution rate and hit the max on your own. If you have an employer match, then you will exceed the $18K by whatever percentage match your plan gives you. Be careful with how much you contribute because the matching funds rules may differ across employers. I had one employer where funds were matched based on each pay period, so if I maxed out contributions before the end of the year, I would miss the match that was in those remaining months.

If you are a highly compensated employee, you may be compensated differently than others and you may be able to negotiate that a portion of your compensation be classified as employer contributions to your 401K. This is one way to get closer to the additional $37K of contributions.

However, if you want even more control of your contributions so that you can really max out the $55k, and if you are an entrepreneur or small business owner, it is possible to setup your own 401K plan or SEP IRA and shift salary into employer contributions.

It may be tough to even strive to maximize the employee contribution, let alone the total contribution, especially when most of us barely manage to make the employer match percentage, but as our incomes grow with experience, we can move closer and closer to beating these contribution thresholds to maximize the full advantages of the 401K.

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