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401K Contribution Limits

The IRS has imposed certain limits on the amount that can be contributed to an individual?s 401(k) plan account in a year. The IRS also decides the maximum pre-tax amount that can be contributed to this plan. For the year 2005, a maximum limit of $14,000 pre-tax contributions made to employer sponsored plans were set up. The maximum pre-tax contribution limit is slated to be $15,000 in the year 2006. These contribution limits are the outcome of the Economic Growth and Tax Relief Reconciliation Act of 2001. The maximum pre-tax contribution limit, in post-2006 period, is indexed in $500 increments for inflation. Even if one works for more than one employer these is the IRS pre-tax limit for a particular year. The IRS has also fixed maximum limit for the aggregate sum that may be contributed to the 401(k) account by all the sources. This not only includes any employer matching or profit sharing contributions as well as any employee after-tax contributions.

As far as the catch-up contributions are concerned, if one is expected to reach age 50 or older the limit for additional catch up contributions $4000 in the year 2005, it is $5000 in 2006. After year 2006, these limits will be subject to cost of living adjustments commonly known as "COLA." It is important to note here that at the end of the calendar year, if an employee's your regular pre-tax contributions have not exceeded the Plan contribution limit or the IRS annual dollar limit, some or all of the employee's catch-up contributions could be treated as regular pre-tax contributions. The contribution limits have been devised in such a way that the employers do not discriminate to favor the highly compensated employees.

401K provides detailed information on 401K, 401K Rules, 401K Rollover, 401K Contribution Limits and more. 401K is affiliated with Money Management Strategies.