The 2012 cap on 401k contributions will be announced soon by the IRS. Those who are serious on planning for their annual retirement savings are waiting for this. The total 2011 401k contribution limit is USD 49,000. All the numbers set as limits for retirement contributions are indexed for inflation every year. This limit to your total contributions for the whole year can increase by USD 1,000 annually. So it is possible that in 2012 the total contribution limit will be USD 50,000.
The 401k plan is a retirement benefit that’s funded by salary deduction. The employee and the employer agree on the portion that will be given to the retirement plan from the employee’s salary before withholding federal income tax. So that the there will be some form of control on how much money an employee can give to his plan, the government dictates these limits every year.
The total contribution limit mentioned above includes all your pre-tax deferrals and your post-tax contributions. Each of these items also has its own cap set by the IRS. The 2011 401k maximum contribution coming from your salary before withholding federal income tax is USD 16,500 if you have a traditional or a safe harbor 401k. But if you have a SIMPLE 401k, you’re limited to USD 11,500. These limits are also indexed for inflation and can increase by USD 500 at the most for 2012.
Also coming from your gross salary, you can add a catch-up contribution. This one, though, is only applicable to those who are at least 50 years old. Those who are in this age bracket were given the catch-up contribution benefit by the government to help them save a little bit more before they do retire. The 2011 401k contribution limit for catch-up is at USD 5,500 for traditional and safe harbor plans. USD 2,500 is the limit for SIMPLE 401k plans. Like the regular pre-tax deferral, this can also increase by USD 500 for next year.
Your employer can even add some more money from their own pocket to your pre-tax contributions. Your employer can match your pre-tax deferral depending on the ratio that that he’s imposing. A common offer is 50 cents to every dollar you contribute from your pre-tax salary.
In addition to all your pre-tax contributions, you can still give more from your salary after taxes and other deductions. However, to be able to do this, the sum of your pre-tax and post-tax contributions shouldn’t exceed the total 2011 401k maximum contribution of USD 49,000.
2012 is soon approaching and the IRS is expected to broadcast the contribution limits for retirement plans any time. Consult your 401k adviser if you wish to take advantage of the savings you can make through your plan next year.