401k participants can contribute up to a total of USD 50,000 to their retirement plan in 2012. The IRS 401k contribution limits for 2012 has been increased from the total annual maximum of USD 49,000 that were sustained from 2009 to 2011. The IRS (Internal Revenue System) announced recently that this is due to the cost-of-living index for the quarter ended September 30, 2011 was greater than the cost-of-living indexes from 2008 to 2010. All limitations for pension and retirement plans are indexed for inflation every year. The total contribution limit for a 401k plan can be increased by as much as USD 1,000 annually, depending on the cost of living.
One major reason why employees take advantage of the yearly IRS 401k limits on contribution is the fact that their elective deferrals and investment gains are not subject to federal income taxes until the time of distribution. An elective deferral is the amount set aside from the employee’s pre-tax salary as contribution to his 401k plan. This amount should be something the employee and his employer agree on. In 2012, the IRS 401k contribution limits only for standard pre-tax deferrals will be USD 17,000 for traditional and safe harbor 401k plans. This is another increased item on the IRS list for next year. From 2009 to the current year, it’s been at USD 16,500. Pre-tax deferrals are also indexed for inflation in increments of USD 500 every year. For those who have SIMPLE 401k plans, however, their pre-tax deferral limit stays at USD 11,500.
Also, for those who are qualified to make catch-up contributions, the IRS 401k limits won’t change for next year. Traditional and safe harbor plan holders can add only up to USD 5,500 and SIMPLE plan holders, up to USD 2,500. These numbers have been the maximum since 2009. Catch-up contributions are limited to participants who are at least 50 years old. These contributions are also taken from employees’ salaries before withholding federal income tax.
In addition to all your pre-tax deferrals, you can also add more contributions to your 401k through your after-tax salary. You’d then ask up to how much after-tax contributions you can make. The limit here is defined by the sum of all your pre-tax deferrals and your after-tax contributions. The total of all these should not exceed the total contribution limit set for the year – i. e., USD 50,000 for 2012.
The limits for 401k contributions have been raised to help you save more for retirement. If you’re a 401k participant, make sure you consult with your plan administrator to know how you can take advantage of this increase for your retirement plan.