What Is Total Contribution for Retirement Plans?

“Total contribution” in retirement planning refers to the complete amount of money placed into an individual’s retirement accounts within a given year. Understanding this concept is fundamental for managing long-term savings and ensuring compliance with tax laws. It also helps optimize the growth of retirement funds, allowing individuals to maximize their savings potential.

Components of Total Contribution

The total contribution to a retirement plan includes employee elective deferrals and employer contributions. Employee elective deferrals can be pre-tax, reducing current taxable income, or Roth contributions, made with after-tax dollars for tax-free withdrawals in retirement.

Employer contributions are also part of the total. These include employer matching contributions, based on employee deferrals, and profit-sharing contributions, where employers distribute company profits to retirement accounts regardless of employee contributions.

Rollovers are different. Funds transferred between retirement accounts, like from an old 401(k) to an IRA, are rollovers and do not count as new contributions for annual limit purposes. These transfers maintain their tax status, allowing continued growth without impacting annual contribution limits.

Annual Contribution Limits

The IRS sets annual limits on retirement plan contributions. For 2025, the employee elective deferral limit for 401(k), 403(b), and governmental 457(b) plans is $23,500. This limit applies across all such plans an individual participates in; for example, if an individual has multiple 401(k)s, their combined employee contributions cannot exceed this amount.

Individuals aged 50 and over can make additional “catch-up” contributions. For 2025, the catch-up contribution for 401(k), 403(b), and governmental 457(b) plans is $7,500, bringing the total employee contribution limit for those aged 50 and older to $31,000. An enhanced catch-up contribution applies to those aged 60 to 63, allowing an additional $11,250, for a total employee deferral of $34,750 in 2025, if the plan permits.

For Individual Retirement Arrangements (IRAs), including Traditional and Roth IRAs, the annual contribution limit for 2025 is $7,000. Individuals aged 50 and over can contribute an additional $1,000 as a catch-up contribution to their IRAs, making their total IRA contribution limit $8,000. IRA contributions are separate from employer-sponsored plans, allowing contributions to both up to their respective limits.

The overall limit for defined contribution plans, such as 401(k)s, includes both employee and employer contributions. For 2025, this combined limit is $70,000, or 100% of the employee’s compensation, whichever is less. For participants aged 50-59 or 64 and over making catch-up contributions, this combined limit can be $77,500. If the enhanced catch-up contribution for ages 60-63 is utilized, the combined limit can reach $81,250.

Addressing Excess Contributions

Contributing more than annual limits to a retirement account can lead to penalties and requires corrective action. When total contributions exceed the maximum, the excess is subject to taxation. For IRAs, a 6% annual excise tax is imposed on excess contributions each year they remain in the account, continuing until removed.

To avoid these penalties, individuals must remove excess contributions and any attributable earnings. For employer-sponsored plans like 401(k)s, excess deferrals should be distributed by April 15 of the year following the contribution. If not corrected by this deadline, the excess deferral will be taxed in both the year of contribution and distribution.

For IRAs, excess contributions must be withdrawn by the tax filing deadline, including extensions, for the year they were made, along with any net income attributable to that excess. If not removed by this deadline, the 6% excise tax applies. The earnings portion of the withdrawn excess is taxable in the year the contribution was made.