401k Plan Facts – Tax Benefits, 401k Rollovers & Terminating
Written by Karam Swanner on July 29th, 2009
October is an important month if you have one or more 401K investment account. This is the month that the IRS releases the updated standard of living rate. This is the figure which determines how much you will be allowed to contribute to all of your accounts in the next year. This amount and the rules surrounding it are the 401K maximum contribution guidelines.
The maximum amount is a combined total for all of your 401K accounts, including any Roth 401K accounts you may have. Therefore, you cannot open additional accounts and put this same amount into each of them. The combined total cannot exceed the maximum rate for the year.
To determine exactly what your maximum contribution can be for the year 2009, you have to figure out two different numbers. The first is the maximum figure released by the IRS for all contributors and the second is the maximum limit imposed by the plan your employer has set up for you.
Take the lower figure of these two and you have the maximum amount you can contribute for the year.
For 2009, the max contribution is up over a thousand dollars from the previous year. It is currently at $16, 500 and that is based on the new figures for the standard of living in the country.
Now that you know this information, you have to determine the percentage of your income that your company plan will allow you to contribute. This will always be in the form of a percentage of your total salary and never one set figure. For example, someone who earns $45, 000 a year would be allowed to contribute up to $4, 500 if their employee plan allowed for a max of 10% to be contributed.
Since the amount governed by the employer’s plan is much lower than the IRS number, this contributor will be bound by the maximum amount given by the employer. That means the IRS number does not apply to this person.
If you do not earn more than $100, 000 for your annual salary, then you will always be looking at your employer’s percentage figure instead of the IRS figure. The higher $16, 500 contribution applies to those in the higher income brackets.
Yet, there is an extra catch-up contribution allowed for contributors aged 50 or over. For 2009 this figure is an extra $5,500. Again, this is to be spread amongst all of your 401K accounts if you have more than one. Not every employer allows the catch-up contributions, so you must ask if you want to take advantage of the extra contribution.
If your employer contributes some of your money as a match or incentive program, that does not interfere with your 401K maximum contribution amounts. You will be able to contribute your full amount without regard to how much your employer adds into your account.
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