[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.
Maximum Employee and Employer 401K Contribution Limits and Catch-up Amounts
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.
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Official Reference: IRS
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[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.
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.
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
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
More Related posts:
- 2012 Maximum Employee and Employer 401K Contribution Limits and Catch-up Amounts
- 2011 401k, 403b, IRA Contribution and Income Limit Changes from 2010 Officially Released by IRS
- 2012 Simple IRA and SEP IRA Contribution Limits – Small Business Retirement Plans
- 2012 401K, IRA and Roth IRA Contribution and Income Deduction Limits
- Traditional IRA versus Roth IRA – 2011 Contribution and Phase-out Income Limits
{ 26 comments… read them below or add one }
can both my wife and i contribute to 401k’s for the maximum amount (at diferent companies) of f approx $17,000? I’m over 50… so i can invest the extra catch up amount….
or can I contribute to my hospital’s 401k + catch up and can she invest in a ira or roth ira at the same time? are there any maximum amounts for couples?
You can both contribute to your 401K plans as the limits are individual (unlike taxes, where couples have joint income thresholds). This also includes the catch-up contributions. Maximum limits for all retirement account contributions can be found here : http://www.savingtoinvest.com/2011/11/2012-maximum-employee-and-employer-401k-contribution-limits-and-catch-up-amounts.html
Assume you are covered by a defined-benefit plan and you contribute a certain amount for this plan. If, in addition, you have a 401(K) and 457(B) plan in effect, what is the total amount you are allowed to contribute to all of these three plans. Is there an overall annual limit applicable to these three plans together?
Yes. You can see this article for maximum limits : http://www.savingtoinvest.com/2011/11/2012-maximum-employee-and-employer-401k-contribution-limits-and-catch-up-amounts.html
What is the maximum contribution a Missouri city may make to its employees’ 401K plans?
Great question and I updated the post with the information. Your employer’s 401K maximum contribution limit is is $49,000 or 100% of your salary, whichever is the smaller amount. Though most employers rarely give anywhere near the maximum, with most employers matching 3% to 6% of employee contributions. Technically, this means that your employer could contribute up to $32,500, if they wanted to, and it would not count against your $16,500 personal contribution maximum .
What are the differences b/w a 401k and a 403(b) plan?
Answer: Very little. Both are offered by your employer, both may or may not feature employer matching contributions, both take contributions pre-tax up to a specified yearly limit, both are called “defined contribution” plans (versus “defined benefit” like pensions), and both are great ways to save for retirement. The differences between the two types of plans have been greatly minimized with the passing of the Economic Growth and Tax Relief Reconciliation Act of 2001. Remember, the names of these plans are derived from the section of the United States Internal Revenue Code under which they are defined. The three main ones are the 401(k), the 403(b), the 401(a) and the 457. So, it’s not necessarily the case that the plans are different, they’re just specified in different sections. That being the case, the main difference is that the 401(k) is offered by for-profit businesses whereas the 403(b) is offered by not-for-profit businesses. [The 401(a) and the 457 cover employees of state and local governments and some other tax-exempt organizations.] For all intents and purposes to the employee, there are very few other differences (you can get your money out earlier than 59.5 under certain circumstances) but there is proposed legislation to bring the two plans even closer together. If you’re deciding between two jobs (even if it’s your current job versus your potential new job), one that offers a 401(k) and another that offers a 403(b), rest assured that they’re basically the same so it should not affect your decision
What is the maximum amount that an employer is allowed to contribute to an employee’s retirement plan – for a non-profit corporation, if that makes a difference.
Can you contribute the limit 16,500 to 401k and then contribute to your 403b at another job up to 16,500? which total 33,000 a year for retirement.
No. The maximum contribution limit is $16,500 per year to a 401K or 403b account. However you can contribute to an IRA or Roth IRA account. Here are more details: http://www.savingtoinvest.com/2011/09/2012-401k-ira-and-roth-ira-contribution-and-income-deduction-limits.html
Hi , I am 40 yo now, and I am making more than 250K. I currently work for a small company which provide 401K. I do contribute maximum amount of $16,500. I also own a side bussiness and I did contribute a maximum amount of $11,500 this year into Sep IRA. I know that is only $27,000 total can be save for this year retirement. I used to have an accountant and I did have profit sharing plan which i can contribute about $40,000 a year. Can you help me, Is there any thing else I can set up to maximize my contribution for retirement. thank you
hi,
I was in a training program making 50k per year. I worked from Jan 2010 to June 2010 and then started a job which pays very highly, because my training is now complete so salary is no longer a stipend but a huge check everymonth compared to what I made earlier.
My training program did not offer any retirement savings. So far I do not have any retirement savings. Since 2010 is already gone can I still open retirement account for tax benefit in 2010 or not?
When I asked HR division in my company they told me that I can open one for 2011 but not for 2010. Someone who is good in this area told me that I can open independent personal IRA with any of the companies like charlesschwab, fidelity etc for 2010?
I would like to what you all suggest?
thanks
DL
You can open a personal IRA for 2010 – See this article for more options and rules : How and Where to Open a Traditional IRA or Roth IRA Account and Factors to Keep in Mind
Thanks much andys2i, I really appreciate your help. I read the article you mentioned. Based on that I understand that I can contribute $5000 and my non earning wife also can contribute (hopefully…!) $5000 in IRA for 2010 before April 2011.
I am planning to do this as pre tax dollars so I can save some money in taxes. My question is between me and my wife do I have option to invest more in pretax money as employee did not provide 401k plan, or do I have to content with max 10000 for us as a couple.
thanks again for your quick reply.
DL
I work for a small company where highly compensated employees apparently cannot contribute the maximum to the 401k plan because of lack of participation by other employees. I am over 59 and would normally make catch-up contributions but apparently cannot because of the current 401k rules. Does anyone know of a publication (IRS or otherwise) which clearly explains the rules regarding highly compensated employees in small company 401k plans and the rules for contributing to these plans if you are over the age of 59. Any help would be greatly appreciated. I have searhed in vain on the IRS web site and have called them only to be placed on hold over 1/2 hour several times.
DC,
Would need more information, but the IRS establishes maximum contributions but allows individual employer plans to establish their own rules on contribution limits and percentages. If your employer plan is allowing you contribute 15% and you are within the contribution maximums outlined by the IRS then you should be fine.
Hi, If I have already contributed to my ROTH IRA (maximum amount), can I also contribute to my employers 401(k) plan? (new to me this year).
Thanks
Yes. Your Roth IRA limit is 5,000 (assuming you qualify based on income limits). Your 401K contribution is $16,500 or up to 15% of your income (modified AGI). You can and should contribute to both.
andys2i wrote:
“…to ensure that your Roth IRA contributions are deductible at year end.”
Roth IRA contributions are deductible?
Ehh, the table says 2012 is depends on info released in 2011…so no CJ, it shouldn’t be 2010
If my employer limits my 401K contribution to 12%, but I’ve only been contributing 7% and I am eligible for the catchup contributions, can I use the catchup contribution percentage to bring my total to 12% of annual salary plus $5500? Their website allowed me to increase my catchup percentage to 15%, but I am wondering if the IRS puts the contributions in separate buckets and I will get in trouble even though I don’t exceed the maximum combined total.
As above…. Would need more information, but the IRS establishes maximum contributions but allows individual employer plans to establish their own rules on contribution limits and percentages. If your employer plan is allowing you contribute 15% and you are within the contribution maximums outlined by the IRS then you should be fine.
Basically, contribute as much as your plan will let you…. usually they will not let you exceed the IRS maximums.
>401k and IRA catch up contributions are usually the best tool utilized by people nearing their retired status, who didn’t save early for their retirement.
>Your table says the 2011 limits are announced in October 2011. Shouldn't that be 2010?
CJ,
Correct. The 401k limits for 2011 were announced in late October 2010.
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