 |
 |
.jpg) |
401K Contribution Questions Answered
The vast majority of us are looking forward to that day in the future when we can finally hang up our work clothes for good and enjoy our retirement years. However, if you do not plan well, you may not be able to continue the lifestyle you are used to enjoying. One of the most popular ways that people are saving for their retirement is with a 401K retirement account. There are of course 401K contribution limits and tax exemptions that must be understood to get the most out of this type of retirement account.
What is a 401K Contribution?
In a nutshell a 401K contribution is the amount of money that you either have your employer take out of your paycheck or you personally deposit into a 401K retirement account as described by section 401k of the Internal Revenue Codes. Most people, who work for a company that offers a 401K savings plan, opt for automatic payroll deductions that are paid into their retirement account.
Since this money is considered tax exempt as long as it is kept in your 401K retirement account, this not only makes things easier for you, but reduces you annual tax liability. In this instance you fill out a specific form that tells your employer exactly how much you want withheld. This can either be based on a set percentage of your income each pay period or you can decide on a specific dollar amount.
In many cases, your employer is going to offer to match your 401K contribution as a way to further encourage you to invest in your retirement. How much they offer is going to vary from one employer to another, in many cases the longer you stay with a company the better their matching contribution is likely to be.
Some of the bigger corporations will actually match their employees contributions at a rate of 1 to 1, thus for every dollar you deposit into your account, they will match it with a dollar from the company. In order to take advantage of this type of contribution, the average company will require you to remain with them for several years until you are vested before you can actually access their contribution.
Are there Limits to My 401K Contribution?
As with all good things there is a limit to the amount of your 401K contribution each year. Rather than being figured as a percentage of your annual salary, the IRS has set an exact dollar amount. For the years 2008 through 2010 this amount was $15,500, for the year 2011 it will go up by $1,000 to $16,500 for all employees that are under the age of 49.
For those over the age of 50 the IRS allows an additional contribution of $5,000 per year. This amount is what is known as the "catch up figure" and is intended to give those ages 50 and over a fair chance at catching up with those under 50 who have been able to take advantage of the 401K program for several years or more.
Why do they consider the set dollar amount to be fair? This is done mostly for income tax purposes. If there were no limits or the limits were based on a percentage, those in the upper tax brackets could use their 401K account as a tax shelter to stash their superfluous income in a place where they would not have to pay income taxes on it. With set limits, everyone gets the same tax break and the system is less at risk of being abused.
Are there Annual Deadlines for Making 401K Contributions?
If you are already contributing to an IRA, you know that you have until Tax Day or April 15th to add money to your IRA account. With the 401K the rules are very different; you have until close of business on the 31st of December of each calendar year to make your contributions if you want them to be credited to that particular year. Should you miss the deadline the money will counted as part of the next year's contributions by the IRS and you will not get to count that money as part of your deductions for that tax year.
Whether you are employed and have your employer take out payroll deductions to make your 401K contribution or you are self-employed and take care of them yourself, you will find that if you want to retire in comfort, making the maximum contribution each year is going to help you be able to retire in the style you are dreaming of.