401k Max Contribution
Retirement planning is a tough ask, and unless people are offered some incentives, few would be willing to do that. In the United States, such incentives are offered in form of tax deferments. Therefore, there are 401k plans, and some Individual Retirement Accounts (IRAs) that entitle people to defer their taxes.
Deferment of taxes implies that contribution into 401k plans would be taxed after they crystallize, i.e., when they are paid to the individual who is retiring or leaving the job for whatever reason. Even the amounts that are earned on these contributions are taxed at the time of such distribution.
But this would mean people who earn more could set aside more monies for their retirement. That is not true. There is a 401k max contribution limit. Each year, IRS announces this limits, rather, it announces limits of all contributions, including specifically, limits into 401 (k) plans. This maximum contribution to 401k is determined based on the cost of living, and projections into retirement.
In addition to the limits of 401(k) contribution maximum, people of certain age, i.e., 50 and older, are allowed to contribute additional amount. This is called 401k catch up. Like 401 k maximum contributions, there is 401k maximum contribution catch up as well.
Apart from tax deferment, there may be some 401k plans, wherein employer contributes as much as the employee into 401 k plans. Therefore, there is 401(k) maximum employer contribution as well.
In 2006, a new type of 401(k) plan, called Roth 401k was introduced. It has features of both Roth IRA, as well as 401k. Therefore, a person contributing into a Roth 401K may do so before or after tax. It may be noted that contributions into Roth IRA are after tax, therefore, they are not taxed at a later date. However, the other advantage of Roth IRA is that they enable the legal heir to inherit monies without being taxed. In 2009, the maximum ceiling fixed for 401k plans is $16,500. This includes contributions into Roth IRA.