Sep Ira

What Are The 401K Limits

The 401k plan is perfect for anyone who is seriously planning their retirement. These plans are highly popular and the higher the amounts of tax deferred income invested, the more lucrative the returns will be. However, the IRS has imposed limitations on the amount of a person's income that is allowed to be invested on an annual basis. There can be three forms of 401k limits set on an employee's retirement plan, the Government's limit, the employer's match limit and the employer's overall limit.

The Government's 401k limits are basic amounts that slightly increase from year to year and for those over 50 years of age, an additional catch up amount of $5,000 is permitted. In 2006, the 401k limits were at a maximum of $15,000, in 2007, the limits are $15,500 and the proposed limits for 2008 are $16,000. The catch up 401k limits of $5,000 are allowed to give older savers the chance to make the most of the benefits of compound interest as well as younger savers.

It costs companies to run the 401k plan and some match dollar for dollar the amounts that their employee's contribute. The company may have an overall limit which is allowed to be less but no more than the Government's limits. For company's who match the amounts, they may need to impose a restriction on the amount of funds that they are willing to donate. Employer contributions are not subjected to the normal 401k limits but are instead limited to 6% of the pre-tax compensation. In 2007, total contribution limits were limited to $45,000 while employer contributions were limited to 100% of the employee investments. It is the smaller amount of the two that actually applies to any individual case.

Compensation limits affect highly paid employees on similar retirement plans but the 401k compensation limits only depend on the employing company offering such a plan. However, highly compensated employees may be subject to additional contribution limits depending on the employer's overall participation rates. The total of the deferrals and contributions made can be up to 125% of the average deferral percentage of all eligible non-highly compensated employees annually. Adjustments to 401k limits over the years depend on raised costs of living.

A 401K plan is one way to go when planning for your retirement. Remember the guidelines given here to get you started on saving for your retirement. Retiring with a healthy cash balance may give you the chance for a life of luxury in your golden years.

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