Glossary > 401 (k) Plan

401 (k) Plan

A 401(k) plan is an employer-sponsored, tax-deferred retirement account. 401(k) plans are only available through a job within the United States. With a 401(k) plan you can invest pre-tax money into the stock market and defer paying taxes until you withdraw from the account upon retirement.

401ks are one of the absolute best vehicles for investing since you’re adding pre-tax money. Adding money to a 401k – especially when you get a company match – is usually considered the best (commonly available) place you can put your money. If you have a company match, I’d recommend you do everything you can to contribute at least enough to get the company match.

401(k) Contribution Limits

The IRS website lists up to date contribution limits for each year. In 2020, the maximum contribution amount was raised to $19,500 per year. Those 50 or older are allowed to contribute an additional $6,500 for a total of $26,000 in 2020.

Year Max Contribution
(Under Age 50)
Max Contribution
(Age 50+)
2020 $19,500 $26,000
2019 $19,000 $25,000
2018 $18,500 $24,500
2017 $18,000 $24,000

This is your personal maximum contribution – not the total amount that can be contributed. If you have an employer match, that is not considered part of this maximum contribution.

There is a maximum amount for your contribution AND your companies match which starts at $57,000 total for the year. Chances are your company isn’t matching your contribution dollar for dollar, making it rare to hit this limit.

What Should You Invest in Within Your 401k?

The simplest portfolio you can go with is a target-date retirement fund. These have names like “Vanguard Target Retirement 2045 Fund Investor Shares” which is what you might invest in if you want to retire sometime around the year 2045. If you’ve never invested before, these are usually a good first step.

For more information on how to invest within your 401k, check out Minafi’s free Minimal Investor course, which goes a number of things including how to evaluate the funds in your 401k, how fees work and which funds you should pick to maximize tax-efficiency.

What If You Contribute More Than the Maximum to Your 401(k)?

If you’re anything like me, your 401(k) website doesn’t make it easy to hit the yearly maximum target. Fidelity, for example, only lets you set a percentage of your income to allocate and it must be a whole number! I’ve gone over every year since that change.

If you do go over, the first thing you’ll want to do is ask the payroll department how they’ll handle it. Usually, it’ll work out to be something like this:

  • In the first few months of the year, the accounting department will figure out how much you exceeded the contribution amount by.
  • They’ll withdraw that amount and any match from your 401(k) account.
  • You’ll have the amount you contributed added to your paycheck and will be required to pay taxes on it at your ordinary-income rate.

Some companies will do this automatically, but it’s better to check in with them if you already know you’ve exceeded the maximum contribution. Companies need to make this refund before taxes are due in mid-April, giving companies a lot of time to issue this correction. You obviously want that money as soon as possible – so be sure to ask about it!

Courses Mentioning 401 (k) Plan

Here are all 10 courses that mention 401 (k) Plan here on Minafi.

The Minimal Investor

Learn everything you need to know to invest for the rest of your life.

10 Lessons Basic about 3 hours 884 students

Investing Taxes Stocks Bonds
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A deep dive into why the stock market is one of the easiest and safest investments you can make.

7 Lessons Basic about 2 hours

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It's not about constantly monitoring the market and making trades. Learn how long-term investors grow their wealth without the need to constantly monitor them.

7 Lessons Basic about 1 hour

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Compound interest, diversification, fees and taxes make up the core pillars of a solid investing strategy.

7 Lessons Advanced about 1 hour

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Let's take everything we've learned and put it together. We'll analyze a number of funds and go through the process of how to narrow funds down to the one that's just right for you.

3 Lessons Intermediate 23 minutes

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Plan out what funds you'll invest in and in which accounts for maximized diversification and tax-efficiency.

6 Lessons Intermediate about 2 hours

Investing Stocks Bonds
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Open any accounts you need to invest and make your actual investments.

7 Lessons Advanced about 2 hours

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If you're currently investing with a financial advisor, managing your own money can save you a bunch over a lifetime.

3 Lessons Advanced about 2 hours

Investing Advisor
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Make a plan for how you'll invest your time going forward.

10 Lessons Intermediate about 3 hours 154 students

Financial Independence Mindfulness
Retire in Style

Create a plan for how you'll withdraw funds from your accounts.

8 Lessons Basic about 2 hours 494 students

Retirement Taxes Mindset

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