401k Limits - 401k And Ira

401K Limits On Tax Deferred Contributions

Currently the IRS has imposed limits on the contributions a person can make to their 401k plan whether it be as an individual or through their company. The 401k limits that are imposed by the IRS for both individual 401k plans and those that have been set up by companies for their employees.

At present there are several limits which apply to the contributions a person can make to their 401k plan. There are three rules which apply to these limits

• This is based on the limits which are placed on the employee making the contributions.
• Is based on the limits which are placed on the employer who is making contributions to their employee's 401k plan.
• Final one relates to that to do with pre tax contributions against the total contributions made.

Below we will now take a closer look at some of the different 401k contribution limits.

A. The pre tax employee contribution limit

Normally more often referred to as tax deferred contributions in 2006 this was set at $15,000 and this year has now been set at $15,500. They decided that as from 2007 the contribution limits on a 401k plan would be indexed to inflation and so each year the increments would be in steps of $500. This is not automatic, however, as can be seen from the fact that the 2008 401K employee limit remains at $15,500.

B. The catch up contribution limit

This can be used by those who are 50 or over at the end of each calendar year. So instead of having to stick with just making a total contribution of $15,000 to their 401k plan in 2006 if they were aged 50 or over then could include an additional $5,000 on to this. All of the contributions that this person makes during that year are on a pre tax basis. Again as with the normal contributions that a person makes the catch up contribution limit may be brought in line with inflation so in the future each year the amount of contributions that a person can make through this system could be increased in $500 steps. While an increase was anticipated for 2008, it did not happen so the limit for both 2007 and 2008 will remain at $5000.

Also be aware that if you contribute to more than one 401k plan then the total contributions you make must not go above the specific year's limit for all of them. Unfortunately you do not get a separate limit for each one.

C. The pre tax employer contributions

These are those that are paid by an employee's employer and normally match the contributions that they are making. The contributions that the employer makes do not contribute towards those that are made by the employee. However there is a restriction on what the employer is allowed to make and this is restricted to 6%. So if for example you were say earning $100,000 then the most that your employer would be allowed to make towards their employees 401k plan is $6,000. So you may well find that your employer may restrict the amount of contributions that you yourself make towards your 401k plan even if the government established limits on the plan are higher than what they want you to contribute.

However there are a number of factors which affect 401k limits and these include a person's salary, their employers participation as well as pre tax versus tax contributions that are made. Certainly if a person has any queries with regard to their 401k plan they should speak with their employer's plan administrator or a financial advisor.

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