Contribution Limits of 401(K)

The 401(k) retirement plan is a great retirement account for the employees available at present. The plan allows the employees to collect certain amount of money during their career by saving money to get reasonable amount as pension for the retirement life. The contribution limits of the 401(k) plan include catch-up limits, total contribution limits, pre-tax and the limits applicable to the highly-paid employees. There are certain 401(k) maximums which do not allow exceeding certain amount while making contributions to the account. The maximum money you can contribute to the account depends up on the age of the employee.

In a 401(k) plan, it is crucial to remember that the contribution limit will change each year. The maximum limit to contribute is based on the living costs of the person in the previous year. The contribution limits are normally announced during mid October. The contribution maximum of 2011 is same as that of the last two years and the limit is $16,500 per year. The maximum may be increased in next year because the US government recalculates the limitation regularly due to the inflation. The rate normally increased is $500 each year.

The applicants of 401(k) plan who are eligible for additional contributions are the employees of more than 50 years of age and this kind of contribution is known as the catch-up limit. The catch-up amount is also limited by the maximums and the present maximum contribution limit is $5,500. Again this rate is also recalculated because of the economic changes, mainly due to inflation and the increasing rate here also is $500. Catch-ups help the employee to increase the funds in their account during the last ten years of the pre-retirement. This contribution limit is useful for a person who applied for the 401(k) plan at a later age.

The employee can decide whether to provide after tax or pre-tax contribution. If the person is applying for after tax contribution, then he/she should apply for Roth 401(k) program. Both after tax and pre-tax accounts can be created by the employee, if required. But the contribution limits of both accounts together should not exceed the amount mentioned in the 401(k) maximums. In other words, the yearly contributions to both of these accounts should not go beyond the limit of $16,500. If the employee is above the age of 50 and creates catch ups, then the amount contributed to both of the accounts together should not go beyond $22,000.

Never mix up because if the amount exceeds the contribution limits, then you have to pay heavy taxes. If you have exceeded the maximum contribution limits of 401(k), then you have to withdraw additional amount by April 15th of next year. This plan is available for both self-employed and hired employees. In the case of hired employees, the contributions are automatically deducted from the salary. But in case of self-employed people, you have to apply for a solo plan known as the Individual K.