The Internal Revenue System (IRS), the US government office that implements the country’s tax laws, has increased the 401k limit for 2012 to $17,000. Since 2009, employees were only required to pay up to a maximum of $16,500 annually. For those who are 50 and above, they can pay a catch up of up to $5,500, to a total of $22,000 annually.
So, what are included in the computation of your 401k limit on contributions for this year? In addition to the standard elective deferrals that are allowed of all 401k plan participants , after-tax contributions, catch-up elective deferrals and any other discretionary contributions are counted in your total maximum contribution for the year.
An elective deferral is your arranged contribution to an employer-sponsored retirement plan. This contribution is made by putting aside a part of your salary before federal income tax is withheld. $17,000 is the 401k limit on traditional and safe harbor elective deferrals for 2011. SIMPLE 401k plan participants, on the other hand, can contribute up to $11,500 only.
If you are 50 years old or over, you have the benefit of adding pre-tax contributions on top of the regular elective deferral. The state has given this bonus for people to be able to save a little more during the remaining few years before they reach their retirement age. The maximum catch-up contribution limit for traditional and safe harbor plans is $5,500, while for SIMPLE 401k, $2,500. So, for instance, if you are 50 years old or older, you can contribute to your traditional or safe harbor 401k plan up to $22,500 on your total pre-tax deferral alone.
You may be fortunate to have a plan that imposes employer matching contributions, which is not counted towards your annual maximum contribution ceiling. This benefit means your employer will match a certain percentage of your pre-tax contribution and give this amount to your plan. The 401k limit on employer matching contributions is set at 6% of your pre-tax salary.
Finally, in addition to the regular elective deferral and the catch-up contribution, you can also contribute a part of your post-tax salary, if specified in your plan. The only main rule to follow is that, when your post-tax contribution is added to your total pre-tax contributions, your total contributions for the year still do not exceed the lesser of the two values – the annual maximum of $50,000 or 100% of your total compensation.