401k Maximum - 401k And Ira

Your 401K Maximum Contribution

A 401k plan is an employer sponsored retirement scheme provided in the US and a number of other countries. This particular retirement plan is named after a section of the Internal Revenue Code set up by the US Government. But there is a 401k maximum contribution that a person can make each year and below we take a look at what the 401k plan is including the contributions a person is allowed to make.

It is this plan which allows a person to save for their retirement and defers any income tax payments to be made on the money that is saved and any interest or earnings made on these contributions until they actually begin to withdraw it. Currently the maximum contributions a person is allowed to make for 2007 is set at $15,500. Then each year onwards the contributions a person can make may increase. However, for 2008 there will be no increase in the salary deferral portion of the 401K contribution limits so it will continue to be $15,500.

As well as making the normal contributions (salary deferral) to their 401k plan anyone who is over the age of 50 can make further contributions to theirs which are known as "catch ups". Currently these stand at $5,000 for 2007. However as with the normal contributions a person can make to their 401k the catch up contributions may be increased each year in $500 steps. However, despite an increase being anticipated for 2008, it di not materialize so the catch up remains at $5000. Depending on economic conditions - primarily inflation, both these limits could increase in 2009.

When it comes to contributions a person makes to their 401k plan they can make the decision whether they are pre tax contribution or if they wish they can make them after tax and contribute to a Roth 401k plan instead. They could if they want even contribute to both plans. But it is important to remember that the 401k maximum contribution they are allowed to make for both plans together is still only $15,500 for 2007/2008 and not $15,500 for each plan. If you work for more than one employer in a tax year and have multiple 401Ks, your employee contribution to ALL 401Ks can not be greater than $15,500 (2007 and 2008).

However if an employee does contribute more than the 401k maximum contributions allowed in any one year then this excess must be withdrawn from the account by the 15th April next year. So if you were to say contribute $16,500 in 2007 then you would need to withdraw the additional $1,000 you have contributed by the 15th April 2008.

When it comes to the actual contributions that a person makes to their 401k plan that will depend on the type of plan their company uses. Generally the 401k maximum contribution limit a company sets will be a percentage of the person's salary and will work in tandem with the actual limit that has been set by the US Government. In addition some companies may make contributions for their employees. If you are self-employed there are additional advantages to a solo 401K plan (also known as an Individual K) which are well worth investigating.

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