401k Contribution Limit

There are two types of 401k contribution limit. The first 401k contribution limit is set by the IRS and specified in the Internal Revenue Code (IRC) section 401k. The second 401k contribution limit is set by each 401k retirement plan. The 401k contribution limit set by the employer is a percentage of the employee's income whereas the IRS' 401k contribution limit is an absolute amount which is quite high. The 401k contribution limit is much higher than an IRA's contribution limit.

IRA vs 401k Contribution Limit

While an IRA contribution limit is only a few thousand dollars in total, the 401k contribution limit is considerably larger. The 401k contribution limit set by the IRS is over $10,000 and can be over $20,000 with catch up 401k contributions. Most people prefer investing and contributing to a 401k because of this high 401k contribution limit. Even business owners who do not have employees or small businesses with few employees can prefer setting up a 401k retirement plan because of the high contribution limit. Higher contribution limit means that the participant can grow his/her assets tax deferred faster.

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