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A Guide to Maximum 401k Contributions

A 401k is a type of retirement plan that allows an individual to put funds in a separate account for purposes of retirement. One of the main attractive qualities of a 401k is that employers can help their staff save for retirement by allowing tax-deductable contributions. In addition, some employers will also match the amount of contributions made by the employee.

401ks are different from other types of retirement plans for a number of reasons. First of all, individuals can contribute up to 15% of their income into their account. However, the amount can change according to the employer. In addition, employees also need to keep in mind that the money they contribute is taken before tax deductions.  However, individuals withdrawing their funds before the required age will need to pay penalties and taxes on the action.

What is the Maximum 401k Contribution?

The maximum 401k contribution will depend on the type of plan you’re enrolled in. The contribution limit for traditional or safe harbor plans is currently set for $17,000 starting from 2012. However, the contribution limit for simple 401k plans is set at $11,400 for 2011 and 2012. These limits may change, depending on the cost-of-living adjustments and inflation that may occur in the next few years.

For individuals that have started contributing to their 401ks in their later years, some plans allow them to use ‘catch-up’ contributions, up to $5,500 dollars a year. In order to qualify for ‘catch-up’ contributions, the individual must be 50 years or older. For more information on contributions on 401ks, or retirement plans in general, the Internal Revenue Service provides a number of resources for applicants.

Tips before Contributing into a 401K

Generally, an employer will allow an individual to put up to 15% of their income into an account. But before quickly deciding to put the maximum contribution into your account, there are a few different factors to consider first. Important factors include your current income and savings, and whether you have money saved for the upcoming months. Before planning for retirement, individuals should ensure that they have enough money saved for the immediate future. A good savings cushion is considered to last around three to six months, which will allow individuals to protect themselves in case of emergencies and sudden unforeseen circumstances.

Additional important factors to consider are the economy and your job security. More than ever, it is harder for individuals to secure a job, let alone save for their future. However, it is important that individuals start saving early, to ensure that they can live comfortably during their retirement years. Individuals starting to save need to consider their budget and whether their income allows them to start contributing to a 401k. However, if you have a job and are relatively secure, one of the smartest financial decisions is to start a 401k. To find out more about 401k and how to apply, check out the resources provided by the US Department of Labor.

You can also learn more about 401k plans through our business guide pages "401(k) Plan Basics" and "401(k) Plans Key Terms."