Maximum 401k Contribution & Catch Up Contribution Limits

This article provides an overview of 401k contribution limits, catch up contributions, pre-tax and total contribution limits that apply as well as rules that highly compensated employees must follow. Before 2001, the maximum contribution limits on 401k retirement accounts was too low, not encouraging many employees to bother saving for retirement. However, after the Earnings to Lift Individuals and Empower Families (RELIEF) Act of 2001, the government has increased the maximum 401k contribution limits, as well as released the feature of Catch up contributions to allow those people 50 or over to save more money towards retirement, and thus “catch up.” Starting 2006 and the years beyond, the maximum 401k contribution limits will be incremented each year to match with adjusted inflation.

Pre-Tax 401k Contribution Limits

Below are the pre-tax individual 401k contribution limits set by the IRS, starting from 2004.

Year Pre-Tax 401k Contribution Limit
2004 $13,000
2005 $14,000
2006 $15,000
2007 $15,500
2008 $15,500
2009 $16,500
2010 $16,500
2011 $16,500
2012 $17,000

Pre-Tax 401k Catch Up Contribution Limits

401k investors who reach the age of 50 before the beginning of the calender year are permitted to make additional Catch Up contributions to their 401k retirement accounts, the limits are shown below on a pre-tax basis.

Year Pre-Tax 401k Contribution Limit
2004 $3,000
2005 $4,000
2006 $5,000
2007 $5,000
2008 $5,000
2009 $5,500
2010 $5,500
2011 $5,500
2012 $5,500

Employer Maximum Contribution Limits

In addition to participant contribution limits, the IRS imposes limits on how much an employer can contribute towards their employees’ retirement. The contribution limit for employers is 6% of the employee’s pre-tax gross salary. For instance, an employee earning $90,000 a year in 2008 can contribute the maximum ($15,500) towards his 401k plan, and the employer can match the contribution by 6% x $90,000 = $5400. If the employee is 50 or older, he can contribute an additional $5000 in 401k Catch Up contributions. Total contributions would thus be:

Year = 2008
Employee’s Age = 52
Employee’s Salary = $90,000
Employee 401k Contributions = $15,500
Employer 401k Contributions = 6% x $90,000 = $5,400
Additional 401k Catch Up Contributions = $5000
Total Contributions = $15,500 + $5,400 + $5000 = $25,900

Matching 401k Contributions

Some employers will match their employees’ 401k contributions for example every 50 cents on the dollar. Thus, if the employee contributes $8000 towards a 401k in 2008, the employer could match it up by 50% thus contributing an additional $4000, making the total $12,000.

Highly Compensated Employees

Highly compensated employees that make more than $100,000 a year are subject to special contribution limits based on their employer’s overall 401k participation rate. Highly compensated employees should talk to their HR department to understand the limits that apply to them. The total of elective deferrals + contributions made by your employer under a Section 401(k) plan cannot exceed more than 125% of the average deferral percentage (ADP) of all eligible non-highly compensated employees in a calendar year. If total contributions exceed the ADP limit, then the overpayment must be refunded back to the employee or recharacterized as an after-tax employee 401k contribution towards a Roth IRA or different 401k account. Any excess 401k contributions made by highly compensated employees must be reported on IRS Form 1040, line 7 as taxable income.

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