401k plan is perhaps one of the essential retirement plans for employed individuals nowadays. That is why it is imperative to gain some insights about some important aspects of the plan which includes the 401k maximum contribution, pre-tax contribution limits, total contribution limits, excess deferrals, and catch-up limits, among many others.
For those individuals who want to leverage on their 401k plan to their retirement portfolio, the increase in the maximum contribution limits of the 401k plan is good news for them. The pre-tax contribution limits have increased by $1000 – from $15,500 in 2008, to $16,500 in 2009, up to the current year 2011.
These limits may change by increments of $500 in the future based on the inflation rate for that year. Such amount can significantly enhance the retirement plans of many individuals. Catch-up benefits are further added for people who are in their fifties and above.
Catch-up contributions allow qualified individuals to make additional contributions in order to catch up for the lost years, where no contributions were made. Such contribution also has its own limit. It used to be only $5000 in 2007 and 2008, but it has already increased to $5,500 starting 2009 until 2012. Similarly, increments of $500 may be observed according to the inflation performance. However in 2011, there is no increase and the maximum limit remains at $5,500.
When it comes to excess deferral (which is usually termed for the amount of contribution made that is already in excess of the maximum limit of the plan) it is important to notify the plan in advance before April 15 of the following year in order for you to get back the amount of contribution that you already paid. Otherwise, the amount shall be carried over to the succeeding year and it shall be taxed again. Thus, it will be such a disadvantage because this previous contribution will be taxed twice if you fail to ask for refund.
Keep in mind that the above contributions are usually tax-deferred contributions. It is best to check the 401k plan if it allows you to make after-tax contribution. Take note that the limit in this case is quite different from pre-tax contribution limit. The limit is usually 100% of the compensation or $49,000 for the 401k plan, whichever is lower. This amount may also change based on inflation by increments of $1000.
Nevertheless, it is highly recommended to keep these things in mind regarding your 401k plans. By knowing some of the important aspects of the plan, like the 401k maximum contribution, you can optimize your retirement portfolio that will ensure a comfortable lifestyle during your retirement years.