What effect does the contribution limit of a 401(k) have on employees?

The contribution limit of a 401(k) directly influences the amount employees can save for retirement on a tax-deferred basis. When there’s a cap on how much can be contributed to a 401(k) plan each year, it means that employees have a maximum amount they are allowed to defer from their taxable income for that year. This restriction is significant because it determines how much employees can take advantage of the tax benefits associated with these retirement accounts, helping them grow their savings without immediate tax implications.

For example, as of 2023, the annual contribution limit was set at a specific dollar amount, meaning that contributions beyond that limit would not receive the same tax advantages. Therefore, employees must plan their contributions carefully, keeping the limit in mind to maximize their retirement savings effectively while still benefitting from tax deferral.