Do 401(k) Contributions Limit Social Security Benefits?

Written by: Marty Shields 

A question we have heard recently is whether contributing to your employer 401(k) or 403(b) plan will limit your social security benefits when you retire.  This question comes from the misperception that you don’t pay Federal Insurance Contribution Act (FICA) tax on those contributions.   The simple answer is contributions to your employer retirement plan do not limit your social security benefits because although you do not pay federal or state taxes on those contribution you do pay FICA taxes on contributions to your employer 401(k) plan.  Therefore, trying to maximize contributions to an employer retirement plan is beneficial to your retirement.  In 2015 the contributions limits for 401(k) or 403(b) plans are $18,000 and if you are 50 or older there is an additional catch up contribution amount of $6,000.

So that you understand FICA, it consists of a Social Security tax and Medicare tax. The total FICA tax rate an employee pays is 5.65 percent, which breaks down to 4.2 percent for Social Security and 1.45 percent for Medicare. Employers calculate the FICA tax using your gross pay. There is an annual wage limit for Social Security tax which is $118,500 in 2015. Once your earnings reach this limit, the employer no longer has to deduct Social Security tax from your paycheck

As always, if there are any topics you have questions regarding please let us know and we will answer your questions.