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401k Contribution LimitsThe IRS sets a maximum 401k contribution every year. This is not the maximum amount people can put in their retirement account, but rather the maximum amount they can take out of their pre-tax income for their 401k. There is also an additional amount that people fifty years of age or over can contribute, which is called a ‘catch up contribution’. This allows people who are nearing retirement to pad their account a little more, and can be a boon for those who have not adequately prepared for their later years. It’s important to remember that these are the contribution limits of 401k for a person’s combined 401k accounts. This means that if a person has two accounts, they cannot save the maximum amount in each. Although diversification is a good long term plan, it does not have an effect on the amount of pre-tax income a person can contribute to their 401k. However, these are not the only 401k contribution limits, but rather a general guideline. Special circumstances may lower or raise the amount people are allowed to save. For instance, many employers have plans that cap contributions below the 401k contribution. In this case, an employee cannot put the maximum legal amount toward their retirement plan. In most cases, you will have to examine both the IRS limits of that year as well as the limits set by your individual plan and go by the lowest number. There is, however, good news in this tangle of limits and red tape. If your employer offers matching contributions, this will not be counted toward your 401k contribution limits. This means that the limits set by the IRS may be essentially doubled. Depending on the employer’s policies, the ‘catch up contribution’ may be included, allowing middle aged employees to put as much as $40,000 a year toward their retirement without any tax penalties whatsoever. The government says it wants citizens to save, both for retirement as well as for personal and economical crises, butthis can be difficult to believe considering their policy on savings. The confusing policies and limits make 401k retirement plans intimidating and complex, but they are nonetheless an important part of planning for your retirement. Whatever the contribution limits in any particular year, the most important aspect of planning for your retirement is to research the maximum amount of pre-tax income you can put toward your 401k and then to save that precise amount. These accounts allow you to save as well as to lower your tax burden, which is a good deal that no one can afford to pass up. 401k Contribution Limits Go Back To Salary Info Page
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