Your 401K Maximum Contribution
First, a small disclaimer about the 401K maximum contribution . If you have an unclear or uncertain situation, you may need to explore it with the administrator of your 401K plan, a good tax attorney or other appropriate professional. The IRS does not provide definitive advice. Straight information directly from the laws, rules and regulations is one thing, but remember that the IRS does not stand behind any of the guidance that they provide to taxpayers.
The clearest situation is probably one where you are an employee and your company has set a limit on how much of your salary you are permitted to contribute to your organization's 401K plan. For 2007 and 2008, the maximum employee pre-tax contribution (known as an elective deferral) set by the U.S. government is $15,500. This amount can be adjusted in $500 steps to account for inflation but no increase was made for 2008. If your company has set a limit of 10% of your salary and you are making $100,000 per year, you would be limited to contributing $10,000 to your employer's plan. Where the employer has established a limit, you can only contribute the lesser of the employer limit or the government $15,500 limit. If your employer makes matching contributions, those funds do not count against the government limit.
If, because of your employment situation, you have contributions to more than one 401K and/or Roth 401K during the tax year, the total allowable employee 401K maximum contribution is still that year's government limit. You don't get a separate limit for each 401K. Note that although Roth 401 contributions are not pre-tax, they still count toward the yearly maximum 401K.
As an employee with a 401K you have one more option if you are age 50 or older. The 401K rules allow you to make a catch up contribution of up to $5000 (the maximum 401K contribution catch up for 2007 and 2008). Although this is supposed to be indexed to inflation in $500 steps also, the expected 2008 increase didn't happen. Still, as you close in on retirement age, making use of this option can really help build up the funds available to you when you do retire.
If you are lucky enough to be self-employed and making a good income, you have an additional option for maximizing your 401K retirement funds. Aside from the current $15,500 elective deferral (plus the $5000 catch up if you are over 50), you can also make an additional "profit-sharing" contribution of up to 25% of your eligible salary. The exact amount is affected by whether you are incorporated or not. As (you might expect, this could allow a very large contribution if you are making serious money. So, naturally, there is another 401K maximum which is essentially a grand total allowable maximum stated as the lesser of 100% of salary or $46,000 for 2008. But, at least, it doesn't include the catch up contribution which can be added on top.
As you also might expect, if you are a business owner with employees, there are some additional rules and requirements that can affect you. Under those circumstances you should get professional assistance in setting up and administering a 401K plan for your business. Outsourcing plan management may be the best option.
Whatever your situation, and whatever your age, a 401K can offer you both tax advantages now and a more secure and rewarding retirement. There's very little that be as discouraging and downright depressing as finding yourself continuously struggling to make ends meet after a lifetime of labor when you should be enjoying your new freedom.
Focused on retirement planning and options, 401K-and-IRA.com provides additonal information on 401K contribution limitsfor retirement plans and the 401K maximum limits on tax deferred contributions.
