401k Contribution Limits

Planning for retirement is a necessity. Ever since the virtual death of pensions, 401(k) plans are the desirable choice, and since employers often match the contributions of the employee, employees want to maximize their personal contributions to get as much as they can from their employer. Every dollar a person puts into a traditional 401(k) plan or IRA is a dollar taken off the top of taxable income for the year, so saving money for the future, also puts a few more dollars in the bank account today. Uncle Sam likes as much of your money as he can get, so the Internal Revenue Service (IRS) limits the maximum amount of money you can contribute to a 401(k) plan.

Personal 401(k) pretax contribution limit

The most recent 401(k) pretax contribution limit is set at $16,500, which is the same as the 2010 limit. If you are 50 years of age or older; however, the IRS allows you to make an additional $5,500 pretax contribution to your 401(k).

Employer 401(k) contribution limit

A personÕs employer may only contribute six percent of the employeeÕs annual compensation to a 401(k). For example, if a person earned $100,000 in 2011, that person can maximize his or her 401(k) contribution at $16,500 on a pretax basis, and the employer can contribute an additional $6,000 for a total of 22,500 Ð or $28,000 for a person over 50 who decides to Òcatch-up.Ó

After-tax 401(k) contributions

You may also make non-tax-sheltered contributions to your 401(k) plans. The IRS also limits these after-tax contributions. For tax year 2011, a personÕs total 401(k) contribution (pretax plus after-tax) cannot exceed $49,000. This limitation was the same for the 2010 tax year.

Preparing for retirement is not hard to figure out with a little knowledge combined with a reasonable amount of common sense.

Planning for retirement is a necessity