If you’re participating in a 401k plan, you can set aside a total contribution of USD 50,000 in 2012. The IRS maximum 401k contribution increase, together with the cost-of-living adjustments for all the other pension and retirement limitations, was announced recently. Limits for standard elective deferrals for traditional and safe harbor 401k plans were also raised for the coming year. However, catch-up contribution caps and specific limits for SIMPLE 401k plans will remain the same.
From 2009 up to the current year, the total max 401k contribution has stayed at USD 49,000. In general, pension and retirement plan limitations are indexed for inflation every year. The total annual contribution for 401k can increase by USD 1,000.
As mentioned earlier, the elective deferrals for traditional and safe harbor plans will increase next year from this year’s USD 16,500, which was carried over from 2009 and 2010. In 2012, participants of these types of plans can set aside USD 17,000 from their pre-tax salaries. For those on SIMPLE 401k plans, though, the IRS maximum 401k contribution for elective deferrals is still USD 11,500.
Also unchanged are the catch-up contribution limits for 2012. 401k provisions allow participants who are at least 50 years old to make give an additional amount of money to their plan to “catch up” on saving for their retirement. This type of contribution is also taken from the participant’s pre-tax salary. Qualified traditional and safe harbor participants are entitled to a catch-up contribution of USD 5,500. For those on a SIMPLE 401k plan, they can make a catch-up of USD 2,500.
401k participants who are serious about maximizing their investments take advantage of the max 401k contribution on elective deferrals, because these deferrals and their investment gains are not subject to any federal income tax until distribution.But if you’re planning to contribute more to your 401k plan aside from your pre-tax deferrals, you can still set aside money for your plan from your salary after taxes and other deductions. You just need to make sure that your after-tax contributions, when summed up with all your pre-tax deferrals, won’t exceed the total contribution limit for the year, which will be USD 50,000 in 2012.
If you’re participating in a 401k plan, it would be best if you can take advantage of the contribution limits, especially on your pre-tax deferrals. If you haven’t been seriously thinking about your retirement savings in the past years, perhaps, you should talk to your 401k administrator about the maximum savings you can make and your benefits.