2010 401k Contribution and Catch-up Retirement Plan Limits Unchanged from 2009
[Update Oct 15 2009] The IRS has just announced that cost-of-living adjustments for pension plans and other retirement plans for tax year 2010 will remain unchanged. This is good news for many who had feared that the limits would be reduced. Each year in October these limits are adjusted according to a formula based on the inflation rate in the third quarter vs. the previous year's quarter.
What this means for your 401K and other Retirement Plans: The maximum amount an employee can contribute to a 401(k) in 2010 will remain at $16,500 and for individuals over the age of 50, their catch-up contribution will remain unchanged at $5,500 (see table). The Federal government’s Thrift Savings Plan and other retirement-savi
ngs plans - like Individual IRA's and 403(b) plans - are subject to the same limits.
According to a recent survey of more than 550,000 401(k) accounts, very few Americans are actually saving the maximum allowable per year. Only 7% of workers with a 401(k) plan came within $500 of contributing the maximum allowed by the IRS or their plan limit and that on average, retirement plan participants contribute 6.8% percent of their salaries on a pre-tax basis.
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Many workers have failed to take advantage of higher limits in 401K plans over the last few years. Not surprising given the stock market crash of the year past, which meant that the last thing people probably wanted to look at and deal with was their 401K retirement accounts. However, investing via your employer sponsored 401K or Individual retirement plan (IRA) is still your best form of automatic long term investing thanks to the tax deductions, employer matches and the benefits of compounding. Even fractionally increasing your 401K contributions can lead to significantly higher retirement savings down the road.
More on the 401K limits and contribution rules
The 401k contribution limit jumped up to $16,500 as of January 1st, 2009 (which is unchanged in 2010). That’s a $1000 (6.5%) jump from the $15,500 limit in 2008. Your 401k maximum contribution limit — the combined total maximum contribution that you can make each year to ALL 401k plans in which you participate, including standard 401k plans and Roth 401k plans — is the lower of: (1) the maximum percentage contribution limit allowed under each of your employers' plans, or (2) the dollar limits shown in the table above. For example, if your employer's 401k plan allows you to contribute up to a maximum of 10% of your salary, and you earn $50,000, your maximum contribution limit is $5,000, not the $16,500 contribution limit in 2009 that applies only to higher-paid employees
The matching contributions made by your employer are NOT counted toward your 401k contribution limits. Even if you contribute the maximum amount each year, your employer's matching contributions are in addition to these 401k limits.
Catch up Contribution Limits for those 50+ has also increasedIf you are age 50 or older and your employer allows it, you are also be eligible to make "catch-up 401k contributions" in addition to your regular 401k limits. These catch up contribution limits have also increased to a total of $5,500 which brings the 2009/2010 maximum 401K contribution limit to $22,000 for those over 50. For all those people who feel that they do not have enough of a retirement nest egg, this higher contribution gives them a great tax free opportunity to catch up.
Next Steps
With the stock market in recovery, investing now could be the best decision for many if 2009 was indeed the bottom of the market - see Morningstar.com for a list of the best performing funds. To increase your contribution you normally need to contact your payroll/benefits department or your 401K administrator (like Vanguard, Fidelity etc), and make sure you have the right asset allocation for your age. If you cannot afford to contribute up to the maximum, then try to at least contribute up to your available employer match.
Related Posts
~ New Roth IRA Conversion Rules and Contribution Limits
~ Thinking of Reducing my 401K Contributions
~ Debit Cards linked to your 401(k)! Danger ahead
~ Taxes and my Paycheck
~ A new and more useful Social Security benefits calculator
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September 15, 2009 2:58 PM
Max out your 401K because there is a good chance that social security will run out in the next 20 years with all the government spending and defecit problems.
October 14, 2009 11:40 AM
The tax-deferred 401(k) plan, and others like it, such as the 403(b) and the IRA, have become our nation's go-to retirement piggy bank. Invented nearly 30 years ago as an executive perk — one more way to dodge Uncle Sam — the 401(k) was never meant to replace the employer-guaranteed pension fund, supplemented by Social Security, as the cornerstone of our nation's retirement system. But propelled by a combination of companies looking to cut costs and consumers who wanted control of their retirement destiny, that's exactly what happened.
The ugly truth, though, is that the 401(k) is a lousy idea, a financial flop, a rotten repository for our retirement reserves. In the past two years, that has become all too clear. From the end of 2007 to the end of March 2009, the average 401(k) balance fell 31%, according to Fidelity. The accounts have rebounded, along with the rest of the market, but that's little help for those who retired — or were forced to — during the recession. In a system in which one year's gains build on the next, the disaster of 2008 will dent retirement savings long after the recession ends.
October 22, 2009 2:37 PM
Your chart shows a make-up contribution limit of $5000 instead of the $5500 mentioned in the article.
October 22, 2009 4:39 PM
Good catch Nicki. I have fixed the table - thanks!
October 23, 2009 10:15 AM
Does it matter when you turn 50? Is it as long as you turn 50 in 2010 you are eligible for the additional $5500 contribution?
November 4, 2009 4:56 PM
I agree
"
Max out your 401K because there is a good chance that social security will run out in the next 20 years with all the government spending and defecit problems."