I thought I’d go over some of the contribution limits for the 401(k). This is one aspect of the tax code that hasn’t changed over the past few years, but let’s take a closer look anyway. It’s always good to review some of the rules behind tax efficient investing for retirement. We can expect any changes down the road to be adjustments made in response to inflation. Two basic rules govern the maximum total contribution amounts that you can make to all your 401(k) plans, including traditional 401(k) plans and Roth 401(k) plans. Here they are:
- The first rule pertains to the percentage of your pay that your employer lets you contribute. For example, if you earn $40,000 and your employer allows up to 20% of your salary to be used for your 401(k) contribution, then your maximum is $8,000.
- The second rule is the legal limit allowed by the IRS.
Now since you know how much your employer permits, then this begs the question: what does the IRS allow?
401k Contribution Limits on Pre-Tax Compensation (2011 & 2010)
According to the IRS, the contribution limits remained unchanged from 2009 to 2011. The current year contribution limits for a safe harbor or automatic enrollment 401(k) plan are as follows:
Contribution Limits For Traditional and Roth 401(k) Plans
|Year||Under Age 50||Over Age 50||Catch Up Limits: Age 50+|
Those 50 or older might be eligible to make “catch-up” 401(k) contributions in addition to regular 401(k) contributions, if the employer allows it. Unfortunately, not all employers are required to do this. The additional 401(k) catch-up contribution limits are $5,500 for both 2010 and 2011.
Rules for Multiple 401(k) Plans
If you have more than one 401(k) plan from multiple employers or for example, a standard 401(k) plan and a Roth 401(k) plan, the above 401(k) limits apply. Regardless of the number of plans you participate in, your combined contributions to all plans cannot exceed the above 401(k) limits.
Matching Employer Contributions
Are you one of the fortunate employees with an employer who contributes an additional amount to your 401(k) plan? Usually these contributions are referred to as matching contributions. The good news is that matching contributions made by your employer are NOT counted toward your 401(k) contribution limits.
In other words, if you contribute the maximum amount to your 401(k) plan each year, you are still eligible to receive your employer’s contributions above and beyond the 401(k) limits. Those searching for a job should take into consideration the extra benefits provided by an employer who offers and makes matching contributions. Over the years, this can really add up.
Now if your employer does add to your 401(k) funds via matching, then there are contribution limits that also come into play. Your employer can only contribute a maximum of 6% of your pre-tax pay. So let’s take a quick example here.
Example. For someone under the age of 50 who makes $100,000, your total pre-tax contributions can amount to a hefty $22,500, broken down as follows: $16,500 you can use as your personal maximum, with a possible 6% more by your employer, which is $6,000 (if they match). If you’re over 50, then your total can be bumped up to $28,000 if you decide to take advantage of the $5,500 catch up contribution.
After-Tax 401k Contribution Limits and Other Things To Know
Beyond these basic limits, there are other nuances to be aware of. There is more to consider if you are a highly compensated employee (HCE). HCEs who make over $110,000 may also be subject to limits that are determined by who else in the company is participating in the employer’s 401(k) plan. If you are making over $110,000 then there could be additional rules in place that can further limit your contributions. Something like this used to happen to me consistently in the past and I would get a portion of my funds returned to me. The annoying thing was that the funds returned had to be taxed. It’s just one more thing to keep in mind.
Total 401(k) Plan Contribution Limits. The total limit you are allowed to contribute to your 401(k) account is $49,000 or 100% of your income, whichever is less — but this takes into account any after-tax contributions you can make to your fund. If you want to supplement the pre-tax contributions you are already making, then you can bump up your contribution for the year to a maximum of $49,000 or all of your income (whichever is lower).
Tip: It’s always a good idea to supplement your 401(k) savings with additional retirement funds. You can check these brokers for IRA account information if you’re looking for other ways to build your retirement stash.
Since specific rules might be imposed by your 401(k) administrator, you should review your employer’s plan documents and contact the plan administrator to get the info you need.
Rules for Simple 401k Plans
There are also simple 401(k) plans, which is just another type of 401(k) plan that your employer may have chosen to set up rather than a traditional plan. This type of plan is available to employers with 100 or fewer employees. If this is the type of plan you have, then employer contributions are dollar-for-dollar matching, up to 3 percent of pay, or a non-elective contribution of 2 percent of pay for each eligible employee. Here are the maximum amounts you can contribute to such a plan:
Contribution Limits For A Simple 401(k) Plan
|Year||Under Age 50||Over Age 50||Catch Up Limits: Age 50+|
The catch-up contribution allowed for employees aged 50 and over is $2,500.
Participate In Your 401k Plan!
An employer typically offers a 401(k) plan to all employees. However, there are reasons why you may not be eligible to participate in such a plan. If you are under the age of 21, have not completed a year of service with your company, or if you are covered by a collective bargaining agreement or contract that does not provide for participation in the plan, then you may not be able to open a 401(k) account. But if you can, you should always think about contributing to a 401k, particularly if your employer matches your contributions. At the very least, you get tax benefits and at most, you’re receiving free money!
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