Most employees in the United States have the benefit of having their retirement fund put up in a structured fund held for them by their employers. In the 401k provision of the tax code, employers are mandated to set up a 401k program wherein their workers are allowed to save up a portion of their income in their 401k account so that they can successfully accumulate funds for their retirement. These 401k programs work by allowing the employees to invest in various instruments to grow their retirement fund. In other companies, there is a matching employer contribution to what the employee elects to contribute to his 401k account. Such contributions are not done on a pre-tax basis wherein income taxes are not deducted on the year the contributions are made. Taxes are deffered on the contributed money as well as its earnings upon withdrawal of the retierment fund in later years.
The Internal Revenue Code’s 401k provision stipulates certain limitations to the amount that an employee can contribute to his 401k account. The total 401k contribution limits apply to the matching contribution of the employers as well. Generally, the total amount of contribution should not exceed the total amount of compensation that the employee receives. 401k contribution limits increase every year starting with $45,000 in 2007, to $46,000 and $49,000 in the years 2008 and 2009 respectively. After year 2009, the limits on total contributions to 401k accounts shall increase in increments of $1,000 based on the inflation index. Excess contributions of an employee to a 401k account will result in the employer being slapped with penalties from the violation of the tax code. These excess contributions will be tagged “non-qualified” and cannot be held in the 401k retirement account. Continue reading ‘401k Contribution Limits – How Much Can You Put Into Your 401k?’ »