The 401k limits for 2011 were contribution caps retained since 2009, but for 2012, the total annual contribution and pre-tax deferral limits are raised. The 2012 total maximum contribution is set at USD 50,000, which is a full USD 1,000-increase from last year’s.
Additionally, pre-tax deferrals for traditional and safe harbor plans can be made up to USD 17,000 for 2012. The year 2011, it was at USD 16,500. Pre-tax deferral limits are indexed for inflation in increments of USD 500 every year. For those on a SIMPLE 401k plan, however, the ceiling remains at USD 11,500.
The Internal Revenue System (IRS) recently announced these cost-of-living adjustments, together with those for the other pension and retirement plans. Together with this announcement, these reasons were given of the sudden increase of the 401k limits 2011 for 2012: “… (1) the cost-of-living index for the quarter ended September 30, 2009, was less than the cost-of-living index for the quarter ended September 30, 2008; (2) the cost-of-living index for the quarter ended September 30, 2010, was greater than the cost-of-living index for the quarter ended September 30, 2009, but less than the cost-of-living index for the quarter ended September 30, 2008; and (3) the cost-of-living index for the quarter ended September 30, 2011, was greater than the cost-of-living indexes for all prior periods.”
If you’re plan participant who’s at least 50 years old, you’re also entitled to contribute additional pre-tax deferrals to your 401k plan. Catch-up contribution caps, however, are among the 401k limits for 2011 that aren’t increased for 2012. Traditional and safe harbor participants can give up to USD 5,500 on top of their standard pre-tax deferral. SIMPLE 401k plan participants can contribute an additional USD 2,500.
Additionally, even after your salary has been taxed, you can still use it to add funds to your 401k, if you wish. You can contribute to your plan with your after-tax salary if your plan has a provision for this and if the sum of your pre-tax deferrals and your after-tax contribution will not exceed the total limit for the year. As mentioned earlier, the total contribution ceiling is one of the 401k limits 2011 that were increased for 2012 – USD 50,000.
Investment methods that can help you augment your 401k savings may either be through stock shares or bonds. Excess 401k contributions are not encouraged because they can incur fees. Stick with your 2012 401k max to prevent extra payments in the long run.
These contribution limits are increased to help you save more for retirement. If you’re participating in a 401k plan and would like to take advantage of these raised limits for your contributions, particularly your pre-tax deferrals, consult your 401k adviser.