Maximum 401k Contribution per Year (2009 and 2010)

(March 7th, 2010)

Maximum 401k contributions for 2010 are set at the same level as in 2009 due to unchanged inflation; $16,500 for those people who are 49 years or younger and an additional catch up allowance of $5,500 for people aged 50 or older. Since 2005, maximum annual 401k contribution limits are indexed for inflation and increased at $500 per year, but since inflation has been relatively low in 2009, there was no increase in 401k contribution limits for 2010. In fact according to Forecasts.org, the annual inflation rate in the United States in 2009 was 2.82%, which is preferable by economists.

It is important to know the maximum annual 401k contribution limits because if you contribute in excess of the limit, you will be assessed penalties and will owe taxes on the extra contributions. Extra 401k contributions in excess of the limit are considered ‘non-qualified’ especially for 401k plans, therefore investors should be aware! If you have exceeded the contribution limit for a particular year, you have up to April 15th of the following year to ask for a re-distribution of the over contributed amount to you.

If you receive employer matched 401k contributions (where your employer contributes to your 401k plan on your behalf), then the maximum limit for 2010 is $49,000 which includes both employee and employer matched contribution. For example for the year 2009, a director making $100,000 a year can contribute $16,500 (maximum 401k contribution limit for 2009) plus receive employer matched contribution of 6% x $100,000 = $6,000 making the total ($16,500 + $6,000 = $22,500). If the director is 50 years or over, he can contribute an additional $5,500 catch up contributions, bring the total to $22,500 + $5,500 = $28,000.

401k maximum contribution limits have increased since 2001 at either $500 a year or $1,000 a year so this news by the IRS that the limits will not increase for 2010 comes as a disappointment for investors who actively participate in 401k plans. Investors are hoping 2011 will be a good year for 401k investors who have the habit of maximizing their contributions; because 401k contribution limits have never stayed the same for 3 years in a row; so investors should expect a $500 to $1,000 increase in limits in 2011!

Maximum 401k Catch Up Contributions

Catch Up contribution rules apply to people who are 50 years of age and over. In order to help them save faster for retirement as they have less # of contribution years, the IRS allows them to make extra contributions on top of the regular contributions they make. These are known as 401(k) catch up contributions. In 2009, catch up contribution limit is $5,500, and for 2010 it is $5,500. This means that an employee over 50 years of age can contribute $16,500 + $5,500 = $22,000 to their 401(k) plan in 2010 (remains unchanged from 2009).

Why Should You Maximize Your 401k?

You receive immediate tax break for the year! As an example, if you earn $80,000 a year and contribute $16,500 a year into a 401k retirement plan, your current yearly gross income is reduced to $63,500. This works out as $80,000 - $16,500 = $63,500. Therefore, you have a current taxable income of $63,500 and not $80,000. How much does this save you in taxes? Here are the calculations assuming you are in the 25% tax bracket:

Scenario a) $80,000 x 25% = $20,000

Scenario b) ($80,000 - $16,500) = $63,500 x 25% = $15,875

Net Savings in Tax = $20,000 - $15,875 = $4,125

So what do viewers on this website think? Please do tell us if you:

• Happen to maximize your 401k contributions ever year, or did so in 2009?

• Plan to keep maximizing out your 401k contributions every year, providing your employment is steady?

• Do not currently participate in a 401k plan but would like to start in 2010?

• How do you think maximum limits for 401k contributions will hold up in 2011?

Email us your comments to hsumar at telus.net (replace the at with @)