2008 401k Contributions Limits

The 2008 401K contribution limits are mostly unchanged from 2007 - except for the increase in the section 415 limit on total contributions which is discussed below. For most individuals, a 401K plan is likely to be one of the best possible investments to make in your future. Like any kind of savings, it requires discipline and commitment.

Retirement planning is something that a huge number of us either manage to totally avoid thinking about or simply let slide, year after year. This is stupid (there is just no nice way to put it). Without forethought and planning it is getting more and more unlikely that any of us will have enough to survive on adequately after retirement. With relatively high limits, the pre-tax contributions to a 401K can make a huge difference in the quality of life you have on retirement. And the sooner you start, the further ahead you'll be.

The maximum employee contribution limit for 2008 remains at $15,500. This is what's known as an "elective salary deferral." Be aware that if you are employed, your employer may have set a lower maximum amount of your salary that you can contribute. Any employer limit needs to be applied first. As an example if your salary is $80,000 per year and your employer has set a 15% maximum for the employee contribution then your "elective salary deferral" is limited to $12,000 not $15,500. If your salary is $120,000, while the 15% would be $18,000 you are still limited to no more than $15,500. In essence it is the lesser of the employer determined 401K contribution limit or the $15,500 IRS limit.

Some employers may also offer "matching" contributions up to a certain limit. This is often something like 50 cents for every dollar you contribute up to some limit like 6% or 8% of your salary. Matching contributions are not included in the limits so this is a great deal - instant profit for you since it is not only pre-tax but is essentially an increase of your salary.

It had been expected by many that the "catch up" contribution for 2008 would be increased to $5,500, but it is instead being maintained at $5000 for at least one more year. This applies to those over age 50 only and is independent of the other limits. The catch up is designed to allow those 50 or older to accumulate some extra funds as retirement draws near.

If you are self-employed - i.e. if you are your own employee, you can also make a "profit sharing contribution" to your 401K plan. If you are incorporated, then you can contribute up to 25% of your eligible salary without having to deduct your "elective salary deferral." If you are unincorporated, for example doing business as a sole proprietor, the 25% profit sharing contribution is based on your net eligible salary after deducting the elective deferral and any catch up contribution.

None of this means that the total contribution is unlimited however. Section 415 sets the maximum allowable total contribution. For 2007 this was the lesser of 100% of the employee's salary or $45,000 plus the "catch up" contribution or $50,000 if you are over 50. The 415(c)(1)(A) limit for 2008 is the lesser of 100% of salary or $46,000 plus the catch up for a total possible contribution of $51,000.

For you to take the maximum advantage of your 2008 401K contribution limits, start now with your planning and contributions. And always verify your actions with appropriate tax professionals to make absolutely sure that you have set things up correctly for the best outcome. This can be an excellent means of acquiring substantial resources for retirement while reducing your current taxes, but it's also vitally important to do it correctly.
Wed, Mar 10, 2010 06:15


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401k Limits