The Basic Things You Should Know About 401k and 401k Contribution Limit


Nowadays, people are now looking for further ways to save up for the future so that they can have a more convenient retirement later on. In the United States, employees have the option to allocate portions of their salaries to a retirement savings plan initiated by their employer called 401k, a term coined from a section of the tax code which is the source of this provision. It is important to know what this is all about, the benefits that these employees can get from it, including the 401k contribution limit to this plan.

The idea of a 401k plan is that it is a savings retirement plan that can be used for the wise investments of mutual funds, stocks, bonds and other money market accounts of your choice so that when the amount you have invested does well, you get more money in the long run because your savings will be compounded until the time or age you will be eligible to claim them, usually when you reach 59.5 years old. Actually, in certain circumstances, you can withdraw them earlier but with the burden of incurring heavy penalties and taxes for it. However, unless there are valid reasons, like a permanent disability, you may not be penalized for the early withdrawal. Upon death of the 401k contributor, the beneficiary can also claim for early withdrawal.

Among others, the benefits you can get from taking part of this 401k plan are as follows:

1. Taxes can be deferred until the time of withdrawal where only the net salary of the employee gets taxed for the time being.

2. Employees can benefit more especially when the company or employer, as part of employee benefits, will match your contribution with a certain percentage of your contribution.

3. Employees can loan some amount from the 401k investment which is of course payable with interest.

4. Employees can transfer or roll over their 401k contribution from their previous employer to the next employer or to another legible retirement account.

Based on current information, the maximum 401k contribution limit for 2009 is $16,500. However, for those who are aged 50 and above, they are given the opportunity to catch up on top of the maximum $16,500 contribution but can only be limited to $5,000 per year. There are also special rules governing the contribution limit of highly compensated employees where it regulates them from maximizing their contribution to the 401k plan, depending on the contribution of ordinary employees. The Internal Revenue Code wants to make sure that not only the highly compensated employees will benefit from this 401k retirement plan where the companies will have to undergo nondiscrimination tests annually to make sure that everybody, including rank and file employees have equally availed of the plan.

It is important to know that the 401k contribution limit and catch-up limits are subject to change based on the inflation rate and cost of living adjustments. So it would really help to stay informed on further updates.

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