401k Contributions - 401k And Ira

401k Contributions Limits

It is very important that each person keeps an eye on what 401k contributions they are allowed to make each year. Everyone needs to be aware of the two different contribution limits that are involved when it comes to 401k retirement plans. The contribution limits that are allowable are set by the US Government as well as a limit being set by companies for their employees. Each company will use the US Government Imposed 401k Contribution Limit Guidelines in order to set what they feel is beneficial to their employees with regard to the contributions that they make to a 401k plan.

Over recent years because the US Government has come to realize the importance of people saving for their retirement they have increased the limits that they impose. The reason for doing this is so that as and when people retire no longer do they need to rely on social security in order to live their lives on a daily basis. It could be that by the time some people retire they may find that in fact there is no social security for them to actually rely on.

Currently if an employer wants to they can actually limit just how much their employees contribute to their 401k plan. They could, for example, limit their contributions each year to 10% of their salary so if they were earning say $50,000 a year then the maximum that they could actually contribute through their company is $5,000. But when they look to see what the Government limit is they will notice it is much higher. At the beginning of 2006 the maximum contributions an employee could make in that year to their 401k plan was $15,000. However if a person who is earning $170,000 wanted to put 10% of their salary towards their 401k contributions they could not because this would exceed the limit that has been set by the Government for that year.

The 401k contribution limit for 2007 is set at $15,500 by the IRS. If you are over 50, you can also make an additional $5000 contribution on top of this limit if your employer allows it. If your employer makes matching contributions, which can be uo to 6% of your salary, that is on top of the 2007 401k contribution limit. However, the real effective limit is set by your employer and is usually a percentage of your salary. You absolutely must carefully check the limits placed on your 401k ocntributions by your employer.

Remember, if an employee is over the age of 50 then their company may offer them the chance to catch up on their 401k plan. This means that they can increase the contributions that they actually make up to the limit that has been set by the Government and no higher. For the 401k limit 2007 the maximum allowable by the government is $20,500 plus any employer matching contribution. So at the end of the day it is important that a person is aware of what their company is allowing them to contribute towards their 401k plan. Plus they need to know what the exact limit is with regard to 401k contributions as set by the Government for each fiscal year. Despite early expectations that both the employee contribution and the catchup contribution limits would be increased for 2008, this did not take place and the 2008 401K limits will remain at $15,500 and $5000 respectively.

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