Maximum Contribution Limits of a 401k
A 401k is a retirement-savings plan offered by employers. It allows you to invest a portion of your wages and put off all taxes on both the money you invest and any investment returns until you begin making withdrawals later in life. These plans come with a catch: The amount you can contribute each year is limited.
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Types
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The IRS recognizes two types of 401k plans, and they have different contribution limits. Most workers have a "traditional" or "safe-harbor" 401k. But businesses with fewer than 100 employees can set up a special kind of 401k with reduced administrative requirements, known as a SIMPLE 401k. If you're not sure what kind your employer offers, check with your human resources or personnel department.
Limits
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The maximum amount you can contribute to a 401k plan is set by federal law, and it increases with inflation. As of the 2011 tax year, the maximum annual contribution to a traditional IRA was $16,500. If you have a SIMPLE 401k plan, the maximum contribution for 2011 was $11,500.
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Older Workers
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Workers who are at least 50 years old are allowed to chip in extra money to build up their 401k accounts as they approach retirement. The IRS refers to these as "catch-up" contributions. As of 2011, workers 50 and over with traditional plans could contribute an additional $5,500 a year in catch-up money. For those with SIMPLE 401k plans, the maximum annual catch-up contribution was $2,500.
Consideration
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Individual employers may set lower contribution limits than those defined by the federal government. If they do, those limits take precedence over the federal maximums. For example, if your employer caps annual contributions at $5,000, then that's the most you can put in, regardless of the $16,500 annual federal limit. Or your employer might limit your contribution to 10 percent of your salary. Someone in the company making $200,000 could take advantage of the federal maximum, but if your annual pay is $45,000, you can't put in more than $4,500.
Multiple Accounts
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The limits apply to the combined contributions to all your 401k accounts. If you have two jobs, and each offers a 401k, then the total amount you contribute to both plans cannot exceed the federal maximum.
Matches
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The maximums apply only to your contributions. Employers commonly make matching contributions to workers' 401k accounts up to a point -- for example, matching employees' contributions dollar for dollar up to 5 percent of salary. Matching contributions by employers do not apply to the maximum limits.
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References
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