A 401(k) plan is a
type of profit-sharing plan designed for employees to defer a
portion of their salary, before tax, into a retirement savings
account. Since these contributions are pretax, they actually
generally reduce participants’ income taxes. These plans also allow
employers to make deductible matching contributions, providing a
great incentive for employees to participate.
incentives, however, there are some limitations – primarily in the
form of annual maximum contributions into the 401(k) plan. These
maximum contribution limits typically change every year, normally
(but not always) increasing each January 1st, based on
the cost of living increase during the prior year. Since individuals
may have more than one 401(k) plan, the maximum contribution limits
refer to a combined maximum contribution into ALL 401(k) plans in
which the individual participates.
For example, in
2008, the combined maximum contribution into all of an individual’s
401(k) plans was $15,500. That amount increased in 2009, 2010 and
2011 to $16,500 and is subject to a cost of living increase after
If a participant is
age 50 or older, they may also be eligible to make “catch-up”
contributions that are in addition to their regular 401(k) maximum
contribution limits. These catch-up contributions, however, are also
limited. For example, for the years 2009-2011, the amount of the
catch-up contribution was $5,500.
There are also
maximum contribution limits on the amount an employer may put into
their employees 401(k) plans. In 2009, an employer could contribute
up to six percent of an employee’s compensation into their plan.
What this means is that an
employee with compensation of $100,000 could contribute a maximum
limit of $16,500 on a pre-tax basis, and their employer could
contribute an additional $6,000 for a total 401(k) maximum
contribution that year of $22,500. In addition, if that employee was
age 50 or over, he or she could have contributed another $5,500 in
catch-up contributions, bringing their total contribution for that
year to $28,000.
In addition to
pretax contributions, an individual may also make after-tax 401(k)
contributions. There are, however, limits on the total contributions
made when adding the pretax and after tax deposits. For example, for
2009 and 2010, the total 401(k) maximum contribution is $49,000 or
100 percent of an individual’s compensation whichever is less.
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