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Most families don’t have the advantage of multiple tax sheltering opportunities. A small business, a farm, or nine children are available to only a few, so tax reducing techniques may difficult to come by. As a result, perhaps the single greatest tax sheltering device that most families possess today is their 401k retirement plan.
In this article, we will discuss limits for 2011, 2012 and the years following. We will also assess 401k catchup contributions and 401k matching rules.
401k Max Contributions
For 2011 the 401k limits are now set (changes were made on October 20, 2011) at $17,000. This is the maximum annual 401k contribution allowed by law. This is a figure that has climbed over 65% from $10,000 in 1999, thereby allowing participants to have larger retirement plan tax deductions than ever.
401k Catch-Up Contributions
In addition to the above, 2011 401k catch-up contributions are set once again at $5,500. The 401k catchup gives participants 50 years old and older the ability to sock away a little extra before retirement. The 2012 (and future) 401k catchup will also remain at $5,500, but may be adjusted for inflation in the same way deferrals are currently.
401k Matching Rules
If you’ve been a part of a retirement plan recently, you may have lost your 401k match. Many businesses, both small and large, have simply found that cutting the retirement plan match makes sense to the ongoing health of the business. Employers are looking under every stone for ways to save money, and 401k matches are not immune.
A 401k match typically involves employer contributions to the employee’s account based upon the employee’s deferral. Many employers match dollar-for-dollar, where others contribute less, i.e. 50¢ on the dollar.
Employers are allowed by law to match up to 6% of the employee’s salary. For example, if an employee makes $50,000 per year, the maximum employer match to the employee’s 401k account would equal $3,000.
401k Contribution Limits Summary