Does Profit Sharing Count Towards 401k Limit?

Maximizing retirement savings through a 401(k) plan is a common goal for many individuals. These employer-sponsored retirement accounts are popular tools designed to help workers save for their future. However, the rules surrounding contributions and the various limits can often seem complex. Navigating these guidelines is important for effectively planning your financial well-being. Knowing how different sources of contributions interact with established limits can help you make informed decisions about your savings strategy.

Types of 401(k) Contributions

Money can be contributed to a 401(k) plan from several distinct sources. Employee elective deferrals represent the most direct form of contribution. These are amounts an employee chooses to have withheld from their paycheck and deposited into their 401(k) account, which can be made on a pre-tax basis or as Roth contributions. This allows employees to actively participate in building their retirement savings.

Employer matching contributions are another common component of many 401(k) plans. Employers provide these funds, often as a percentage of the employee’s elective deferrals, up to a certain limit. For instance, an employer might contribute fifty cents for every dollar an employee defers. These contributions are designed to encourage employees to save for retirement.

Beyond matching contributions, some employers also offer profit-sharing contributions. These are discretionary payments made by the employer to employee 401(k) accounts, typically based on the company’s financial performance or profitability for a given period. These funds are entirely employer-funded and represent an additional benefit to employees participating in the plan.

Navigating 401(k) Contribution Limits

The Internal Revenue Service (IRS) establishes specific limits on how much can be contributed to 401(k) plans each year. Two primary limits are especially relevant for individuals. The first is the employee elective deferral limit, which applies exclusively to the money an employee personally contributes from their salary. For 2025, this limit is $23,500 for those under age 50.

This specific limit applies to the total amount an individual can defer across all 401(k) plans they participate in during a single year, even if they work for multiple employers. Individuals aged 50 and over are eligible to make additional “catch-up” contributions. For 2025, the standard catch-up contribution is $7,500, allowing those aged 50 and older to defer up to $31,000.

A special enhanced catch-up contribution applies to individuals aged 60 to 63, allowing them to contribute an additional $11,250 for a total elective deferral of $34,750 in 2025. These catch-up provisions help older workers boost their retirement savings. The IRS adjusts these limits annually for inflation, reflecting changes in the cost of living.

The second, broader limit is the overall annual additions limit. This limit encompasses the total amount of money that can be contributed to a participant’s 401(k) account in a single year from all sources. This includes the employee’s elective deferrals, any employer matching contributions, and any employer profit-sharing contributions.

For 2025, the overall annual additions limit is $70,000 for participants under age 50. This limit applies per participant, per plan. For those aged 50 and over who are eligible for catch-up contributions, this overall limit increases to $77,500, and for those aged 60 to 63, it rises to $81,250. This higher limit accommodates the additional catch-up amounts that can be contributed by older workers.

Profit Sharing and Your Overall 401(k) Limit

Employer profit-sharing contributions are a valuable addition to a 401(k) plan. These contributions do not count against an employee’s personal elective deferral limit. An employee can contribute up to their full personal maximum of $23,500 (or higher with catch-up contributions) from their salary, regardless of employer profit-sharing contributions.

However, employer profit-sharing contributions are included when calculating the overall annual additions limit. This higher limit, which for 2025 is $70,000 for individuals under age 50, encompasses all contributions made to the account. Therefore, the sum of an employee’s elective deferrals, employer matching contributions, and employer profit-sharing contributions cannot exceed this limit.

Consider an example for 2025: an employee under age 50 defers the maximum $23,500. Their employer provides a $5,000 matching contribution and a $10,000 profit-sharing contribution. The employee’s personal deferral ($23,500) is within their individual limit. The total annual additions to their account would be $23,500 (employee) + $5,000 (match) + $10,000 (profit sharing) = $38,500. This total is well within the overall annual additions limit of $70,000.

This distinction allows employees to maximize personal savings while receiving additional employer-funded contributions. These employer contributions, including profit sharing, do not reduce an employee’s capacity to make their own elective deferrals. They provide extra retirement savings up to the higher overall annual additions limit.