Applying for a 401k plan is a good solution that may help you to be prepared for welfare retirement. Here we will explain 401k limits that all people should be aware of to qualify for such plan. There are compensation and contribution limits that are better to know when preparing for participating in a 401k plan.
If you think you are too young to think about retirement and such formalities, as 401k, you are fully wrong. It is generally known that the earlier you begine to contribute to such plans, the more benefits you will get after retirements. All financial planning is built on this strategy: thinking about the future is better to start right now. Analyze your needs for the future and find the ways how to cover them.
There are plenty of retirement plans offered by the government and employers. You can get pensions, IRAs (Individual Retirement Accounts), 403b and 401k plans. Each variant has its own pros and cons. Let’s consider the once provided by 401k plans.
401k Compensation Limits
As opposite to other qualified retirement savings plans, 401k plans do not imply any compensation limits. This is a great benefit compared with other retirement savings plans. You are able to qualify for 401k having any compensation. The only requirement is to have an employer that offers this type of plans to his employees. The company must support these type of retirement plans to make proper salary deductions.
Highly-compensated employees may have contribution limits that depend on the employer’s 401k participation rates. The salary of $110, 000 may imply additional limits. If you have such size of salary, it is better to contact your employer and check whether some limitations are applied to you.
Highly-compensated employees are eligible to have elective deferrals and contributions up to 125% of average deferral percentage (ADP) of non-highly compensated employees. ADP is set in each calendar year, so it may be different with the course of life.
401k Contribution Limits
There are a few contribution limits in 401k plans you should know about. The first one is the group of limits for the employee. The second group of limits is applied to the employer. The third contribution limit is connected to pre-tax contributions and total contributions.
Pre-Tax Employee Contribution Limits
Pre-tax employee contribution limit in 2010 for 401k plan was $16,500. And the same pre-tax limit stays in 2011. In 2012 it is planned to correct 401k contribution limits according to inflation. The expected increase is $500.
Employees who are 50 years old and more have the right to make additional contributions (or catch-ups) in the size of $5,500. In such a way the total contribution amount for this group of employees is $22,00 on a pre-tax basis. This numbers are fair for 2010-2011 calendar years. In 2012 and later catch-up limits for 401k plan will be increased due to inflation.
Mention that these contribution limitations are fair for any number of compensation plans you have. If you have a few plans like 403b or 401k, then the catch-up contribution limit is fair for all your contributions in total.
Pre-Tax Employer Contributions
Usually employers match employe contributions for 401k plans. The contributions of employer do not obey to the limits described before in this article. However, the contributions of employers are limited to 6% from the amount of pre-tax employee’s compensation.
For instance if the salary of employee is $100, 000 in the current calendar year, the employee will be limited in contributions by the sum of $6,000.
Total Contribution Limits
And the final limitation, the total contribution of both employee and employer overall is limited to 100% of employee’s compensation that is $49,000. This is the current limit in 2011. In 2012 it will be revised due to the inflation, and most likely will be increased by $1,000. The total contribution limit includes both pre- and after-tax contributions.
Here are the general explanations of 401k limitations. The pack of 401k plans rules is rather complicated for understanding, they includes lots of terms and specifications for different types of employees, as there are a lot of factors that must be taken into account. All questions about 401k rules should be addressed to your employer’s contribution program administrator.