401k Contribution Limits

Written by Jacey Harmon
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401K contribution limits are set by Congress and enforced by the Internal Revenue Service. 401K contribution limits vary depending on the type of 401K plan you utilize. 401K contribution limits are not set in stone as Congress can change the allowed contributions as they see fit. We will probably see 401K contribution limits continue to move higher as the government is trying to provide incentives for personal savings.

401K Contribution Limits

In 2001, Congress passed the Economic Growth and Tax Reconciliation Act. The law increased contribution limits allowed into 401Ks from $12,000 to $13,000. 401K contribution limits will increase up to $14,000 and $15,000, respectively. Individuals over the age of 50 that are maximizing their contributions may use "catch up" contributions as well.

Contributions into a 401K program are presented as a percentage of income. A person may elect to contribute from 1 to 100 percent of annual income as long as it does not exceed the above limits. Employers may elect to match employee contributions.

Individual 401K contribution limits are set at a much higher level than other 401Ks. Contributions into individual 401ks are made up of two parts. A salary deferral up to a maximum of $13,000 and a tax deductible profit sharing contribution up to 25 percent of income. With the two types of contributions, individual 401Ks have an annual contribution limit of $41,000.

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