401k Limits

All retirement plans have limits. The 401k limits are contribution limits, compensation limits, or catch up limits. Because of these limits one should start thinking about getting a retirement plan as early as possible. One should also know that most of these retirement plan let you withdraw some of the money from their funds under special circumstances. 401k limits are:

Compensation limits
Contribution limits
Catch up limits
Before taxes contribution limits

Compensation Limits – the 401k do not have compensation limits. If your employer offers you a 401k plan you can join no matter how much money you earn. If the 401k limits do not affect your compensation, the Roth IRA plan has compensation limits for both individuals and couples. Employees whose salary is higher than $100,000 in 2007 are called “highly compensated” employees. Depending on the 401k plan, if you are a highly compensated employee you may have some contribution limits. These limits are based on the employer’s overall 401k participation fees.

The IRS has certain 401k limits regarding the sum that one can put in an employer’s plan account during one year. The IRS has also the final saying regarding the biggest sum that can be put into a 401k plan before taxes. All these rules and 401k limits imposed by the IRS are given so that the employer makes no discrimination and does not favor any employees through a 401k plan. Some of the plans have to pass a non-discrimination test each year, but that varies from plan to plan.

Contribution limits and before taxes contribution limits –these limits apply to the employer, employee and also contributions before taxes versus overall contributions. The pre-tax contributions can change from year to year. For 2007 the maximum contribution before tax is $15,500. This limit is imposed by the IRS, but any 401k plan can have its own maximum. The total contribution refers to all the contributions including profit-sharing contributions, any employer matching contribution as well as any contributions made after taxes. The limit given the IRS for the 2007 year is 100% of compensation or $45,000 whichever is smaller. Depending from employer to employer theirmatching contribution limit may differ. However it cannot be higher than 6% of your compensation before tax. No matching contribution is included in the contribution limits.

Catch up limits – this kind of limits refer to persons whoare at least 50 years old before the end of the year. If you are in this category you have to know that you are qualified to make a supplementary contribution. For the year 2007 this extra contribution is $5,000. You have to check up with your employer’s benefits department to see if you are entitled to such a contribution. You should keep in mind that if you have more than one plan, the 401k limits affect the total of all your payments to deferred compensation retirement plans.

401k Limits