What is Contribution Limit?

A contribution limit is the maximum amount of money an individual is legally permitted to deposit into a tax-advantaged retirement account in a single calendar year. These limits are established by the Internal Revenue Code and are adjusted annually for inflation by the IRS based on Cost-of-Living Adjustments (COLA) under Section 415. The primary purpose of setting contribution limits is to restrict the amount of income that individuals can shield from federal and state income taxes, ensuring that the tax benefits of retirement accounts are distributed equitably.

Contribution limits vary significantly by the type of retirement account. For the 2026 tax year, individual contribution limits for Traditional and Roth IRAs are set at $7,500 ($7,000 in 2025), with an additional catch-up contribution limit of $1,100 ($1,000 in 2025) for individuals aged 50 and older. For employer-sponsored plans (including 401(k), 403(b), and most 457 plans), the individual elective deferral limit is $24,500 in 2026 ($23,500 in 2025), with a standard catch-up limit of $8,000 ($7,500 in 2025). Under the SECURE 2.0 Act, a special catch-up limit of $11,250 applies to individuals aged 60 to 63 in 2026. The IRS also enforces an all-sources limit (employee plus employer contributions combined) under Section 415(c), which is $72,000 for 401(k) plans in 2026.

Exceeding these contribution limits results in an excess contribution penalty. Under IRS rules, excess contributions are subject to a 6% excise tax penalty for every year the excess amount remains in the account. To avoid this penalty, taxpayers must identify the error and withdraw the excess contribution, along with any net income attributable (NIA) to the excess funds, before the tax return filing deadline (including extensions) for that tax year.