401k Contribution Limits
I decided to make 401k contribution limits a reference page for you because this has been on of the most frequented and asked about topics over the years. This is a good sign beacuase it tells me people are serious about saving for their future retirement. I think many of us have reached the point where we’re somewhat skeptical about the long-term viability of social security. When I calculate my long-range retirement goals, I leave social security out of the equation. If it is available, I’ll consider it a bonus. Retirement is an area that I want to make sure I do everything in my power to prepare for successfully. In order to do so, you need to know where you’re going and have a detailed plan for getting there.
Keep in mind that the main objective of retirement is to maintain your current lifestyle, if not improve it, when you retire. Your definition of retirement doesn’t have to be age 65. You may be planning for early retirement, or looking for an opportunity to leave the workforce and pursue a lifelong passion. Regardless, in order to get there, you have to remember that successful retirement is going to take planning, discipline and patience on our part.
Each year, the IRS allows us to save or defer certain dollar amounts into qualified employer retirement plans like 401ks and 403bs and individual retirement accounts like IRAs and Roth IRAs. We should remain cognizant of the fact that once that year is gone, we lose the opportunity to put tax-deferred savings away for that year. You either use it or lose it. So, it can be extremely imortant to be aware of the 401k contribution limits so you can get the most out of these accounts every year.
Before we look at the 401k contribution limits, I thought it would be useful to review a little terminology to avoid any confusion. For many of you these are no brainers. However, something I’ve learned is to never assume someone knows what I’m referring to when speaking about money.
401K – A 401k is a qualified plan, established by an employer or plan sponsor where tax-deferred or post tax (Roth 401k) contributions are made. Employers or plan sponsors offering a 401(k) can choose to make matching or non-elective contributions to the plan and may also offer profit-sharing to elibible employees. Earnings for 401k plans accrue on a tax-deferred basis.
Contribution -A contribution is made when money is saved into a qualified account automatically through either a payroll or ACH or manually, for example, when you write a check to fund your IRA or Roth IRA.
401k Contribution Limits
For the 2011 tax year, the limits are $16,500 for individuals under 50. For those over 50, the total is $22,000 including catch up contributions. These limits apply to 401k and Roth 401k plans.
Learn the 401k contribution limits.
Summary
401k plans remain one of the best savings vehicles for retirement. Contributions and earnings made to traditional 401k plans are tax deferred. This is the major benefit of the 401k plan. When you’re investing in a 401k plan, the money you invest earns interest. Because of the tax-deferred status of 401k plans, you earn interest on interest, or compound interest until you retire or take money out of your plan.
When investing in a 401lk plan, you get to decide where your money is to be invested among the options made available in your plan. Check with your employer to see what retirement investment planning tools may be available to you.
The government has established tax breaks for qualified retirement plans to help you save for retirement. If you can, try to max out your allowable 401k contribution limits. You will certainly appreciate it later in your life.