How Much Can You Contribute to a 401(k) Plan?

Save money on taxes with your 401(k) contribution.

Contributing to a 401(k) plan can be one of the best ways to accumulate long-term wealth. Compared to other retirement investment vehicles like IRAs, the contribution limits on 401(k) plans are quite high. Understanding what those limits are and how they impact you can help you make the most of your retirement savings while minimizing your tax liability.

Younger Workers

Workers 49 years of age and under are currently permitted to contribute up to $16,500 per year to their 401(k) plans. This limit is current as of the 2010 and 2011 tax years, but those limits do change from time to time. Each year, the IRS looks at the rate of inflation and a number of other economic factors to determine whether or not the 401(k) contribution limit should be raised, and if it should be raised, by how much. It is a good idea, therefore, to check the current contribution limits each year as you plan your retirement savings strategy.

Older Workers

If you are 50 years of age or older, you can contribute up to $22,000 to your 401(k) plan during the 2010 and 2011 tax years. The IRS allows older workers to contribute extra money to their 401(k) plans to help them catch up and accumulate a larger nest egg over time. As with the standard contribution, the amount of the catch-up contribution changes from time to time, so check with a tax accountant, CPA or tax preparation professional when planning your contribution strategy for the coming year.

Roth 401(k)

Some companies now offer a Roth 401(k) option along with a traditional 401(k). The Roth 401(k) works much the same way as the Roth IRA, in that the contributions do not receive up-front tax deductibility. In return, you can take the money out of your Roth 401(k) tax-free when you retire. If your employer does offer a Roth 401(k) option, your combined contribution to the Roth and traditional plan cannot exceed the maximum allowed by the IRS. You cannot, for instance, contribute $16,500 or $22,000 to your traditional 401(k) and another $16,500 to $22,000 to a Roth plan.

Multiple Employers

If you work for only one employer, the administrator of that company's 401(k) plan tracks your contributions for you and automatically stops those contributions once you hit the maximum allowed by the IRS. But if you work for more than one employer and participate in multiple 401(k) plans, it is up to you to track your contributions and suspend them when you reach the annual maximum. The easiest way to keep track of how much you have contributed so far is to find the 401(k) section on each pay stub. When you approach the yearly maximum, contact each administrator and ask that your contributions be suspended for the rest of the year and started up again after January 1.