1. 401k Matching Contribution Not Subject to Personal Contribution Limit
Your contribution limit to a 401(k) is $18,000. Your employer is allowed to contribute to your 401(k), usually a "matching contribution". That matching contribution comes from your employer, so is not subject to your personal contribution limit.
2. Roth vs Traditional 401(k)
A contribution to a regular 401(k) is typically made with pre-tax money (i.e. you don't pay payroll taxes on the money you contribute) so you pay less taxes for the current tax year. However when you retire and you take money out, you pay taxes on the money you take out. On one hand, your tax rate may be lower when you have retired, but on the other hand, if your investments have appreciated over time, the total amount of tax you pay would be higher.
If your company offers a Roth 401(k) plan, you can contribute $18,000 of after tax money. This way you pay the tax on the $18,000 today, as you would if you did not put the money in the 401(k), but when you take the money out at retirement, you would not have to pay tax. In my opinion, that serves as a way to pay effectively more money into your 401(k).
3. Watch out for Vesting Provisions
Some firms put vesting provisions on the amount that they match in your 401(k), e.g. 4 years at 25% per year. So you have to work 1 full year to be entitled to 25% of their matching contribution, 2 years for 50%, and 4 years to receive all of it. Check your company's Summary Plan Description of the 401(k) to be sure.
4. IRA vs 401(k)
You are not allowed to invest pre-tax money into a Traditional IRA if you are already contributing to a 401(k) plan and have reached the income limits ($62,000 AGI for single head of household).
You are allowed to contribute post-tax money to a Traditional IRA plan if you have already contributed to a 401(k), which you can then Roll-over into a Roth IRA (look up 'backdoor IRA').
The IRA contribution limit applies to all IRA accounts over that calendar year. You could put some money in a traditional IRA, a Roth IRA, another traditional IRA, etc. so long as the total amount is not more than the contribution limit.
This gives you an upper limit of 5.5k + 18k = 23.5 investments in retirement accounts.
Note however, once you reach age 50, these limits increase to 6.5k (IRA) + 24k (401(k)). They also are adjusted periodically with the rate of inflation.
The following approach may be more efficient for building wealth:
- Contribute to your company's 401(k) plan up to the matching limit, ideally a Roth 401(k) if available.
- Pay off any debt you may have (e.g. credit cards, student loans, etc.).
- Buy a home (save for a deposit, etc.). You are allowed to take out $10,000 for a first time home purchase form your IRA, and (depending on your company's plan) borrow up to $50,000 as a 'loan' against your 401(k) for a purchase of a primary residence. To take out $50,000 you need to have at least $100,000 in your 401(k) for over a year.
- Build an emergency cash reserve (some would argue this should be further up the list, such as position 1,2 or 3).
- Contribute to your IRA (ideally a Roth IRA).
This ordering is the subject of debate and people have different opinions. There is a separate discussion of these priorities here:
Best way to start investing, for a young person just starting their career?
Note however, a 401(k) loan becomes payable if you leave your company, and if not repaid, is an unauthorised distribution from your 401k (and therefore subject to an additional 10% tax penalty).
You should also be careful putting money into an IRA, as you will be subject to an additional 10% tax penalty if you take out the money (distribution) before retirement, unless one of the exceptions defined by the IRA applies (e.g. $10,000 for first time home purchase), which could wipe out more than any gains you made by putting it in there in the first place.
Your specific circumstances may vary, so this approach may not be best for you. A registered financial advisor may be able to help - ensure they are legitimate: https://adviserinfo.sec.gov