A man’s got to know his 401k contribution limits

A 401k is a powerful investment tool to help you plan for your retirement, but the government has set limits on how much you can contribute to your plan each year.

A 401k plan lets employees invest retirement savings into a mutual fund or similar investment. Often employers will match employee contributions to the plan, making them an attractive way to fund your retirement because you’re already doubling your money going in. Sweetening the deal is the fact that taxes that would normally be applied to these investments are deferred.

There is a limit to how much employees can invest each year into their 401k plan. The federal government sets limits upon the total amount that can be contributed by employees tax-free. This limit was recently raised, however.

In 2009, the 401k contribution limit for workers under the age of 50 was raised to $15,500. This is up by $1,000 from the 2008 401k plan limit of $14,500.

There’s another limit for workers over the age of 50. This higher limit is set so workers over 50 can “catch up” on their retirement planning by pumping more tax-free dollars into their 401k plans. The 2009 401k yearly contribution limit for workers over the age of 50 is $22,000.

Because employers often also contribute to their employees ‘401k plan, there are also limits on the amount of tax free money they can pump into their employees’ plans. For 2009, an employer may contribute six percent of an employee’s compensation to a 401k plan. For example, if you make $100,000 per year, your employer can contribute up to $6,000 to your plan without you having to pay taxes on it.

Many 401k plans also allow employees to make contributions to their plans over the untaxed limit. The contributions made over the untaxed limit will be taxed. The government does set a ceiling on the total amount of taxed and untaxed contributions that can be made to a 401k plan. The 2009 total for all contributions to a 401k plan is $49,000 or 100 percent of your pay, whichever sum is the lesser. After 2009, the total 401k ceiling will be pegged to inflation and will be able to increase by up to $1,000 per year.

The 401k plan is an attractive retirement option in an increasingly uncertain world. Maximizing your tax-free contributions to these plans is an excellent way to ensure that you have a comfortable retirement.

Tags: maximum limits, new 2009 2010 2011 401k contribution limits