As the start of election year 2012 draws near, many people are closely monitoring the country’s economy and other conditions affecting their finances and future. Most of those who are employed and who are banking on their 401k plans are anticipating if the salary deferral maximum will finally increase next year, unlike the 401k contribution limit 2010 and also that of 2011. The maximum numbers set for 2010 and 2011 were exactly the same as those of 2009. All contribution limits for retirement plans are indexed for inflation every year. The Internal Revenue System (IRS) cited that the inflation was relatively low in the previous years; hence, the retention of the maximum numbers.
Plan participants were allowed to give a total of up to $49,000 for their total 401k contribution limit 2010. In 2011, though it could have increased by $1,000, the limit was retained, as mentioned earlier. However, the total amount of your contribution for the year should also not exceed 100% of your total compensation. So, whichever is less between $49,000 and your total compensation is actually your total contribution limit for the year.
Your total contribution for the year includes your standard elective deferral; catch-up contribution, if any; and, your employer’s matching contribution.
An elective deferral is the amount you and your employer agreed to defer from your gross salary to be placed as funding for your retirement plan. Since the amount is deducted from your salary before withholding federal income tax, you automatically set aside money for retirement and also have a tax cut. For a traditional or safe harbor plan, the 401k contribution limit 2010 on your elective deferral was $16,500. For a SIMPLE 401k plan, the maximum is at $11,500. All numbers also didn’t increase a cent this year.
A catch-up contribution is allowed for plan participants who are at least 50 years old. This is a benefit given by the US government to help those employees nearing retirement age to save more money before they finally retire. If you’re in a traditional or a safe harbor plan, you can add to your standard elective deferral the maximum amount of $5,500. For a SIMPLE 401k plan, on the other hand, the catch up max is $2,500. This, again, is the catch-up ceiling announced in the 401k contribution limit 2010 and 2011.
Employees, especially those nearing retirement age and those intending to maximize their contributions, are expecting a different scenario in 2012. An increase in the contribution ceiling would give them a chance to set aside more money for retirement. Of course, this is in addition to their hoping for a much better economy than the previous years.