401k Contribution Limits from 2002 to 2012 - Pre Tax Limits & Catch Up Contributions

A 401(k) retirement plan will be a person’s best friend when old age hits and the person can no longer work, as it will provide the social security that even the government’s pension system does not guarantee. Therefore, it is your responsibility to make the most of your 401(k) plan so that you can achieve your retirement dreams whether it be cruising the world in a ship, spending time in a vacation home in an exotic location or paying for college for your grandchildren. In this article, we discuss 401k contribution limits, catch up contributions for people over 50 years, pre-tax contribution limits as well as rules for highly compensated employees.

• Pre-tax 401(k) Contribution Limits
• Pre-Tax 401k Catch Up Contributions
• Employer Contribution Limits
• Highly Compensated Employees
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If you have not been participating in a 401(k) plan for many years, there is a piece of good news for you. A legislation known as the Restoring Earnings to Lift Individuals and Empower Families (RELIEF) Act of 2001 was put in to place that has a clause of 401(k) Catch Up contributions. With catch up contributions, investors who are 50 years of age or older are allowed to make additional “catch up” contributions on top of their normal annual 401(k) contributions, so that they can build a bigger nest egg for retirement in a smaller number of years. Remember, it does not depend only on how much you save, it also depends on how long you save for, the earlier you start in your life, the more nest egg you will have upon retirement. For this reason, the IRS has increased 401(k) contribution limits to make it worthwhile and advantageous for people to save for their own retirement, and not depend on the country’s broken social security system.

Pre-Tax 401k Contribution Limits

* Note: After 2009, 401k contribution limits will be incremented by $500 a year to account for inflation.

Pre-Tax 401k Catch Up Contributions

Note: Just like pre-tax 401k contribution limits, catch up contributions are subject to a $500 increment each year to account for inflation.

Employer Contribution Limits

If you look at our section on 401(k) employer matched contributions, you know that to hire and retain good talent, and to comply with the IRS rules of fairness and equality among corporate compensation, most organizations prefer to match their employees’ 401(k) contributions by a certain percentage. The contribution limit set for employers on behalf of their employees is set at 6% of annual compensation, including bonuses.

Highly Compensated Employees

If your annual salary is above $105,000 for the years 2007 to 2009, you are classified as a highly compensated employee and may be subject to contribution limits based on your employer’s overall 401(k) participation rates. The best way to obtain more information about this is by contacting your company’s 401(k) plan administrator and asking about contribution limits for highly compensated employees. Here is the contribution limit for highly compensated employees:

The above is known as the “ADP test” and any excess contributions made exceeding 125% have to be distributed back to the employee or re-characterized as after-tax employee contributions. Any excess contributions made by highly compensated employees must be reported on line 7 of IRS Form 1040. Also, the employee should also receive Form 1099-R for the year the excess contribution was made.