How to Coordinate the Contribution Limits for a Retirement Plan

Avoid excess contribution penalties.

With the traditional defined benefit pension plan quickly becoming a thing of the past, it has never been more important for workers to save and invest for their own retirements. The Federal government has created a number of investment vehicles specifically designed for retirement, but each plan has its own contribution limits. Coordinating the contribution limits on the plans that you use is vital, since excess contributions are subject to taxes and penalties by the IRS.

Things You'll Need

• Pay stubs
• Brokerage and mutual fund statements

Instructions

1. Check the current contribution limits for each retirement plan in which you would like to participate. For 2010, you can contribute up to $16,500 to your 401k plan and up to $5,000 to your traditional or Roth IRA. Workers 50 years of age and older can contribute an extra $5,500 to their 401k plans and an extra $1,000 to their IRA accounts.

2. Contribute as much as you want to your 401k plan. The administrator your employer hires to do the plan is responsible for calculating the amount you have contributed and stopping contributions when the annual maximum is reached. You can track the progress of your 401k contributions by reviewing your pay stubs and looking at the year-to-date contributions.

3. Split your IRA contributions between a traditional and a Roth plan if you wish, but understand that the $5,000 or $6,000 limit applies to the combination of all contributions. In other words, you are not allowed to contribute $5,000 to your Roth IRA and another $5,000 to a traditional IRA. You can, however, contribute $3,000 to a Roth IRA and another $2,000 to a traditional IRA.

4. Set up monthly transfers from your bank account to your IRA. This automates the process and ensures that you make the maximum allowable contribution. Simply divide the allowable IRA contribution by 12 and set that amount as your monthly transfer. If you are 50 or older, for instance, you can have $500 transferred to your IRA each month and you will reach the $6,000 contribution limit by the end of the year.

Tips & Warnings

• Check your brokerage and mutual fund statements to keep track of your year-to-date contributions.

• Keep copies of all retirement plan paperwork with your tax records.

References

• The Money Alert: 401k and IRA Contribution Limits