401k Contribution Limits – How Are They Determined?
401K contribution limits are determined based on several factors, namely, IRS established maximum 401K contribution per year, your employer and policy within a specific 401K plan.
For the year of 2010, IRS allowed a maximum of 401K contribution limits to not exceed $16,500 of pre tax income. All 401K contribution limits are considered variable amounts and could be changed by the IRS in the following fiscal year to account for rising inflation rates.
If you are 50 years of age or older, you can qualify for an annual 401K catch up contribution of $5,500 in addition to previously established maximum 401K contribution per year by the IRS. If you are employed by a small business that uses simple 401K plan, you may be eligible for $2,500 of simple 401K catch up contributions. Your employer is not obligated to offer you the catch up provision, but most employers do this to establish favorable retirement planning incentives that help companies find and keep exemplary employees.
In addition to IRS allowed 401K contribution limits each 401K sponsor (employer) can further limit your contribution limits by the percentage of your gross pay, especially for highly compensated employees, to help them stay within 401K compliance testing guidelines. Each individual 401K plan can also come with additional 401K contribution limits. Talking to your 401K plan administrator will help your figure out which rules and regulations apply to you and what your personal 401K contribution limits are.
By investing a maximum of 401K contribution limits every year you can take advantage of high money market mutual fund rates that help maximize your future retirement earnings.