If anyone of you has ever wondered to yourselves “What is my 401k maximum contribution?” this article will give you the answers. But before we dive into that right away, it would be probably best if we discuss what the 401k is all about not only to serve as a refresher guide to 401k holders, but also inform young individuals who would like to know about the 401k.
The Basics of 401k Maximum Contribution
To put it simply, a 401k is a retirement savings plan sponsored by an employer. Through this, an employer could let his workers save and invest a portion of their earnings before the Internal Revenue Service taxes their income. No income tax will be applied on the allotted money until the money is withdrawn from the account when the employee retires. This allows the employee to take advantage of the tax shield applied to their 401k money and keep income tax low. A contributor can begin to withdraw funds after reaching the age of 59 1/2 years. On the other hand, the Roth IRA or Roth Individual Retirement Account is a special type of retirement plan under US law that is generally not taxed, provided certain conditions are met. By using these two retirement plan vehicles, an employee will have retirement money to spend once they reach the end of their working days.
Though it may sound simple, there are plenty of rules and regulations that should first be set and agreed upon before matters take place. Vesting has been introduced to give companies insurance against employees leaving early. Adding to that is the myriad of rules that are applied when the employee finally withdraws the money and the penalties applied if in case the employee plans to pull out his funds early. One of these rules is the 401k maximum contribution that an employee can shell out. For example, the 401k contribution limits for people aged 49 and below in the year 2011 is now at $16,500, a bit higher compared to the $14,000 limit imposed in 2005. Meanwhile, the Roth IRA Phase Out Range and Limits for a person in a “Single” status is currently at $107,000 – $122,000.
Considerations for Your 401k Maximum Contribution
It would probably be best if you consider the type of 401k that you will be using. The two types, Traditional 401k and Roth 401k have differences on tax implications and when you could access your money. The first main difference is the tax rule, for Traditional 401k, wages are contributed before taxes from each paycheck, like a deferred salary. You pay income taxes on contributions and earnings upon withdrawal. Meanwhile, a Roth 401k plan gets contributions from money that’s already been taxed but have does not require the contributor to pay taxes once the fund is withdrawn. As mentioned above, the 401k maximum contribution for the year 2011 is still at $16,500, so current 401k holders might want to take note of this crucial information in order to know how much can be placed in their accounts.