Today, one of the most crucial retirement accounts for the employees is 401k plan. There are certain people who have been delaying or changing their plan, but the good news is that the Part of the Restoring Earnings to Lift Individuals and Empower Families (RELIEF) Act of 2001, allow you to build your own retirement account and help you to catch up the time that has been lost.
For a lot of time, the 401k contribution limits have received a setback due to lack of attention. Therefore their popularity is not too much and is growing at a slower pace every year. Initially, such problems occurred, but now the issue has been solved to a major extent. Earlier, even those people who were contributing loyally to their retirement accounts did not witness enough growth.
401K Contribution Limits
The alterations that have been made in the 401k contribution limits is a fortunate thing for all the investors. Back in 2004, the 401k contribution limits started increasing. These are explained below in the sections.
Pre-Tax 401k Contribution Limits
IRS has set pre-tax 401k contribution limits in the past few years and for the cmong years as well:
• 2007 – $15,500
• 2008 – $15,500
• 2009 – $16,500
• 2010 – $16,500
• 2011 – $16,500
• 2012 – $16,500 plus an index for inflation ($500 increments)
From the above points, it is quite apparent that the 2012 401k contribution limits will be indexed for inflation. It is this slot that can also rise $500 in the coming future.
Catch-up provision is seen as an added advantage to the people who have reached 50 years of age.
Employer Contribution Limits
Apart from the tax law, the 401k contribution limits can also be imposed by the employer. This limit has been set at 6% of pre-tax compensation of employee. This can be explained with the help of an example. Suppose there is an employee with total compensation package of $1, 00,000, will have $6000 contributed by the employer.
Matching Contributions
Apart from this, the employer can also forward assistance in the form of 401k matching contributions. Usually, this is restricted to percentage of an employee’s pre-tax contribution.
401k is seen as a greatest and the smartest way to save for the retirement. It acts as a financial security for the later years of your life, when all you can do is sit and relax on this steady income.
Since the 401k contribution limits depend largely on cost of living and inflation, therefore, there has been very slow growth in these contributions. This growth had been so slow that a lot of investors also thought of other retirement account alternatives. However, as explained, the problem has received a good solution in recent years and investors don’t really need to worry now.
It is really simple to understand the structure of 401k plan and all the employees can invest in their retirement account by understanding this structure. Saving in 401k is lucrative because it allows you to save for retirement without being taxed on that income. So it is important that you should understand these and contribute fairly.