What You Should Know About 401k Contribution LimitsA number of people want to save money and a number of people want to do tax planning. The 401k plans allow for both these options. In order to ensure the free flow of money in the economy, the Internal Revenue Service has imposed certain 401k contribution limits. These limits need to be adhered to while making the 401k contributions and they are not optional. The IRS regularly revises these contribution limits. The provisions for this revision are laid down in Economic Growth and Tax Relief Reconciliation Act of 2001. This act brought significant number of changes in the tax planning system as was prevalent in the United States. A number of special interest groups as well as business organizations were asking for these reforms for some time. The Internal Revenue Service informs the people about these contribution limits through various means. The limit once announced remains applicable for a given fiscal year unless any6 emergency revisions are made. Another task of the IRS here is to set the limit on the pretax amount which is allowed to be contributed to the 401k plan. As of 2005, the maximum limit on the pre tax contributions was set at $14000. In the next year (2006) this limit was raised by a thousand dollars and was marked at $15000. This limit was applicable on the pre tax contributions made to the 'employer sponsored plans'. The increments of the pre tax contribution are marked at $500. You have to observe these limits even in case you are working with more than one employer. At the same time IRS also sets a maximum contribution limit to the aggregate amount of money that you can contribute to the plan. Being an aggregate sum limit, this takes into account the overall value of your 401k investments regardless of the source where that income comes from. This limit is applicable to profit sharing contributions, your own after tax contributions and even the employer matching contributions. A special provision has been made for catch up contributions for the people who are aged 50 or above. An additional, catch up contribution of $4000 was allowed in 2005 and it was raised to $5000 in the next year. The contribution limits are decided in such a manner that equitable savings are made possible in the organization regardless of the income level of various employees. Generally the investment limit that is imposed on the 401k retirement accounts is revised on an annual basis. This is necessary because of the ever varying inflations rates. As the inflation goes up and the value of dollar continues to fall, the Internal Revenue Services keeps on increasing the 401k contribution limits. This allows the people to save more to combat the rising inflation rates. |