401k Annual Maximum Contribution
The 401k is a very popular means of saving for retirement. This type of plan allows a worker to invest a portion of their earnings in an approved pension plan. The tax on the money invested and any earnings is tax deferred until withdrawn by the worker for retirement. These plans are regulated by the Internal Revenue Service. One of the regulations an investor must pay close attention to is the 401k annual maximum contribution.
The 2009 401k contribution max for the vast majority of people is $16,500. The 2010 401k max contribution is also $16,500. After 2010, maximum contribution limits will be indexed to inflation. As the cost of living increases, the maximum contribution will increase in multiples of $500.
Employees who are 50 years or older at any time during the year may make an additional investment called a "catch up" contribution to their 401k plan. This provision is intended to give older employees the opportunity to increase their savings for retirement since 401k plans were not allowed prior to January 1, 1980. This "catch up" maximum is $5,500 for the 2009 tax year.
Many employees have employers who match all or a portion of the employee contribution to their 401k. For example, an employee might contribute $4,000 to their 401k and the employer would provide a 50% match or $2,000. These matching funds are not included in the 401K annual maximum contribution if they are less than 6% of an employee's total compensation.
Sometimes an employee exceeds the 401K annual maximum contribution. This usually happens if an employee changes jobs during the year and the second employer is not aware of the contributions made previously. In this case, the employee must remove the excess contribution by April of the next year and pay any required taxes. Different rules apply to business owners and highly compensated employees. It is best to check with the administrator of the 401k for complete information since these rules can be complicated.
Whether you contribute the maximum or a little less, investing in your retirement through the use of a 401(k) is very important. The tax savings are substantial. Regular investment throughout your working years can result in a significant retirement fund. The deductions from your paycheck before you see the money makes the contributions seem relatively painless.