How To Understand 401k Contribution Limits

Just like sand in an hour glass that was flipped over on us at birth, our working days are dwindling.  For some of us, let's say the over-50 set, the sand is a little less at the top of the hour glass.  The American dream to retire at a young age has slowly been pushed back for many.

In 1978 our Congress changed the Internal Revenue Code by adding section 401(k) so that an employee could defer pre-tax earned income for their retirement years.  The law went into effect in January 1980.  Now almost all major employers can offer 401(k)s to their employees, with certain guidelines.

Every October the IRS issues new limitations that are set for the following tax year. This year it is October 15, 2009.

The current limitations are as follows:

  • The maximum limit for pre-tax dollars for 2009 is $16,500, with a special rule for those over 50 years of age.
  • The special "catch up" clause allows employees to add up to $5,500 any time during the year with a $500 adjustment added every year for inflationary purposes.

There is some discussion whether the IRS will announce a reduction of $500 at the next session and make a rule change on 401(k) limits.  The current economy has altered the habits of consumer spending and it is thought that the limit reductionwill help consumers use their income dollars to stimulate the economy.  Congress, of course, will have some say in that change and may step in with a fix.

Time never stops and as our clock ticks we lose precious time to make the necessary changes. Those of us nearing the age of 50 and over need to understand that the earlier we react to our retirement planning the better we will be prepared.

A group founded in 1996 by William F. Sharpe (a Nobel Prize-winning economist) called Financial Engines provides investment management and advice for employer sponsored retirement plans.

Recently, Financial Engines released results from a survey of 550,000 taxpayers which showed that only 7% are using the maximum allowed contribution allowed by the IRS.  The sad reality is that the upcoming decision by the IRS may have little effect on either spending or 401(k) contributions.

Check with your financial planner, do the math and plan for your future.  Take the time to adjust accordingly so that your golden years will not be made of copper.  The planning you do now will perhaps give you something to smile about for many years to come.


Share this article!

Follow us!

Find more helpful articles: