The 401k plan is one of the best options for a US employee to save for retirement. You need to know, though, up to how much money your plan allows you to save, if you’re already participating in one or wanting to have one. The Internal Revenue System (IRS) sets the numbers for the maximum contribution to 401k plans.
USD49,000 is the total 2011 401k maximum contribution. If your annual gross salary is less than USD 49,000, however, your total compensation for the year should be your cap. Your elective deferral mainly comprise your total contribution and can have catch-up and after-tax contributions added to it. These components of your total contribution for the year have separate ceilings.
You can save as much as USD 16,500 on elective deferral alone if you’ve got a traditional 401k plan. You and your employer will agree on a portion of your gross salary that will be set aside for your retirement when you sign up for a 401k plan. This elective deferral is a deduction from your wage before withholding federal income tax so it somehow gives you a tax cut.
You can add some more to your pre-tax savings if you’re aged 50 or over. The government saw that there are people who need or want to save some more money once they near retirement. The catch-up contribution was made for this purpose. You’re allowed to set aside up to an additional USD 5,500 for the year if you’ve got a traditional 401k.
On a couple of conditions, you can place some more money in your retirement plan on top of your pre-tax contributions. There should be an after-tax contribution provision stated in your plan. Also, the sum of all your pre-tax deferrals and your after-tax contribution should not go beyond your total 2011 401k maximum contribution.
You should know how you can take advantage of the contribution ceilings of your 401k plan, especially on your pre-tax deferrals. It’s not too late to talk to your plan consultant about how much you can actually save from your salary if you’ve been too relaxed about your retirement savings in the past.
