[Updated for 2013 contribution limits] The IRS has released 2013 employee sponsored retirement plan – 401k, 403b, and Government Thrift Savings Plans - limits and employees will be able to contribute an additional $500 per year, up to $17,500, on a pre-tax basis next year. This was the second consecutive year of increases to contribution limits. The catch-up contribution limit available to employees over 50, remained unchanged at $5,500.
The maximum limit for defined contribution plan deferrals from all sources (employer and employee combined) increased to $51,000 per participant from $50,000 in 2012.
[Updated for 2012 contribution limits] The IRS has now released the official 2012 401k, 403b and other retirement plan contribution limits, which reflect a $500 increase over the 2011 standard contribution limit. This is a result of higher inflation and the latest cost of living adjustment (COLA) figures. The 2012 contribution limit is the first increase in three years. Each year in October these limits are adjusted according to a formula based on the inflation rate (linked to COLA) in the third quarter vs. the previous year’s quarter.
What this means for your 401k, 403b and other retirement plans: The maximum amount an employee can contribute to a 401k in 2012 will increase to $17,000 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-savings plans – like 403(b) and 457(b) plans – are subject to the same limits.
According to a recent survey of more than 550,000 401k 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.
Your 401k maximum contribution limit is 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 youto contribute up to a maximum of 10% of your salary, and you earn $50,000, your maximum contribution limit is $5,000, not the $17,000 contribution limit that applies only to higher-paid employees.
Additional total limits. In addition to the limit on elective deferrals shown in the table above, annual contributions to all of your accounts may not exceed the lesser of 100% of your compensation or $49,000 for 2011 and $50,000 for 2012. Further, the compensation limitation that can be taken into account when determining employer and employee contributions was $245,000 for 2011 and $250,000 for 2012.
Maximum Employer Contributions. Matching 401K or 403b contributions made by your employer are NOT counted toward your annual 401k contribution limits (elective deferrals). Even if you contribute the maximum amount each year, your employer’s matching contributions are in addition to these 401k limits. Your employer’s 401K maximum contribution limit in 2012 is $33,000 ($50,000 $17,000) or 100% of your salary, whichever is the smaller amount. Though most employers rarely give anywhere near the maximum, with most generally matching 3% to 6% of employee contributions.
Contribution deadlines: Remember, unlike IRA plans where you have until April 15th (tax filing deadline) of the subsequent year to make contributions, you must make all your 401K or 403b contributions within the calender year. Some employers do offer extensions, but rarely is this the case.
Official Reference: IRS
[Previous Update - Oct 2009] 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.
Catch up Contribution Limits for those 50+ has also increased
If 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.
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.
What 2011 401K limits could look like
After no change in 2010 401K , thanks to near zero real inflation, it is likely that in 2011 we will only see marginal increase again. However some new retirement legislation like 401K/IRA to Roth IRA rollovers are still available in 2011 and could be beneficial for many looking to implement smart tax strategies in a rising tax environment and possible expiration of bush tax cuts.
Based on the most recent CPI data, inflation is running at about 2%. Given a sluggish economic environment and various forecasts it is likely that inflation will stay around this level. So extrapolating from this we can expect between a 0% (current levels) and 2% rise in the retirement account limits