Recently organized the contribution rules for 401(k), and found that many people are not very clear about the IRS's limit regulations. Since this is so important, I’ll share some key information.

First, the basics. A 401(k) is a retirement account provided by your employer, funded with pre-tax income. This means you don’t pay taxes now, and only pay when you withdraw in retirement. There is also a Roth 401(k) option—pay taxes now, and withdraw tax-free in retirement.

Regarding contribution limits, the IRS adjusts them annually for inflation. The previous rules were: the standard contribution limit increased from $20,500 to $22,500, and those over 50 can contribute an additional $7,500 as catch-up contributions. This means people over 50 can theoretically contribute up to $30,000. The limit for SIMPLE 401(k)s is lower, around $14,000 to $15,500.

Here’s an often overlooked point—the employer matching contributions do not count toward your personal contribution limit. For example, if your employer promises to match 50% of your salary (up to 5%), that part is extra. But the total account balance (including your contributions and employer matches) has a cap, roughly between $61,000 and $66,000. Additionally, the IRS requires that your total contributions do not exceed your annual salary.

There is a special category called HCE (Highly Compensated Employee), defined as earning over $135,000 per year or owning more than 5% of the company. These employees’ 401(k) plans must pass IRS testing to ensure they don’t favor high-income groups.

Many people now ask—should I max out my 401(k)? The answer depends on your financial situation. Ideally, you should first handle emergencies, such as paying off high-interest debt, building an emergency fund, and maintaining health insurance. After that, consider maximizing retirement savings.

If you want to save beyond the 401(k) limit, you can open an IRA account. Traditional IRAs offer similar tax advantages, while Roth IRAs provide tax-free growth. Combining both with your 401(k) creates a more flexible retirement savings portfolio.

The biggest advantage of a 401(k) is tax deferral. Your salary goes into the account before taxes are deducted, reducing your taxable income for the year and allowing you to save more for retirement. Most 401(k) plans offer various investment options—mutual funds, ETFs, index funds, bond funds, etc. Some plans also offer target-date funds that automatically adjust investment risk based on your expected retirement date.

Overall, if you can, it’s wise to contribute close to the 401(k) limit. Don’t forget to take full advantage of employer matching—that’s free money. After managing other financial commitments, eliminating debt, and maintaining an emergency fund, the rest can go into your 401(k). This will make your retirement more secure.