How Much Can I Contribute to My 401k?

It’s never too early to assess your 401k contribution.

For 2009 the maximum you can give is $49,000.

The following is the information you might also want to look into.

Pre-Tax Contribution Limits

The 2009 limit was set at $16,500 and has increased steadily. For 2010 the rate will still be $16,500.

However, the 2010 limit will include an inflation index, with an increment rate of $500.

The Pre-Tax Catch-Up Limits

The catch-up plan is for people over 50 who are trying to add to their contribution. This feature can be very helpful for those who want to add more.

Note that the amounts are on a pre-tax basis. Currently, the catch-up limit for 401k contributions is at $5,500. This is up by $500 from the figure in 2008.

The figure for 2009 will also be the same for 2010.

However, the $500 increments will be factored in. This is also for inflation indexing purposes.

Information about Employer Contribution

A look at the IRS rules will show several stipulations for contribution limitations for taxation laws.

For employers, the percentage is at 6%. This is for an individual’s pre-tax compensation.

How the Contribution System Works

The following should further clarify the matter. Assuming the compensation is worth $100,000 the contribution can be set to $16,500 for 2009. Using the 6% rate, the employer can add in $6,000.

The total contribution would then be $22,500. Those assessing their 401k contribution should keep this in mind. This amount is for those who make payments regularly.

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If you are past 50, additional money can be added. The amount as stated is $5,500 pre-tax. The total would be just about $28,000.

About Matching Contribution

The employer can also make matching contributions for their employees. The match, however, is usually determined by the pre-tax contribution of the employee.

The following illustrates how this works. Assume that the employee contributes $10,000. If the employer sets aside 50 cents for every dollar, the total would be $15,000.

Note for Highly Compensated Employees

If your salary is above $100,000 (period 2008 and 2009) the 401k contribution limits may be different. This should be discussed with your employer.

Generally speaking the elective deferrals from your employer can’t be more than 125% of ADP. Anything more than that will be declared an after-tax employee contribution.

In this case, the employee can take the money and insert it right back into the 401k. Bear in mind that the IRS needs to be notified of this before any action is made by you or your employer.

This should be placed on IRS Form 1040. As an employee, you’ll get the 1099 Form R stating the excess amount.

After-Tax Contribution

The after-tax contribution is also counted for the total funds. When assessing how much you can make, this should be added in as well.

To get the most out of your 401k contribution, you should evaluate all the rules. Take the time to study the matter, and you’ll get the maximum benefits.