Many people know about Roth IRAs and 401k retirement plans, as the importance of saving up for retirement is something we all understand and worry about.  What surprises many people is that while we all have heard about IRA contribution limits, not nearly as many people know that 401k plans also have limits on how much you can pay in per year.  If you have or will ever have a 401k, then you will need to understand 401k contribution limits.

401k Contribution Limits – The Good News

While many people might get worried at hearing words like “caps” and “limits” on their 401k contributions,  the good news is that you can stop panicking, wondering how you can put enough money away with all these limits because 401k contribution limits are high and much higher than IRA limits.  In fact $16,500 is the lowest cap on what you can put into your 401k for a year, which definitely should relieve any worries about not being able to put enough away.  Workers over the age of 50 can put in even more into their retirement investment accounts.

Why age matters

Age makes a big difference to what the 401k contribution limits in 2011 are.

  • $16,500 a year for workers under the age of 50
  • $22,000 a year for workers 50 years older

That’s a big difference, and shows that while early investing is still important for the long term goal of retirement, you still have extra help in catching up later on in life.  Despite this extra boost to workers 50 and over, it’s still very important to get started early on in life.  The name given to the extra amount of money which can be put away by older workers is even called a “catch up clause,” but it’s always best to get started early. Compounding is your best friend when it comes to retirement investing for the golden years of retirement, and starting early will lead to a lot more tropical drinks on a sunny beach when the time comes.

401k contribution limits for 2011

For 2011 the limit for adding to your 401k is $16,500 for workers 49 years old and under while workers 50 years old and older can add in up to $22,000 a year.  These numbers have remained the same since 2008, and based on past trends we’ll probably all see another increase within the next few years of at least $500 to account for inflation.

Employer contributions

There are two other factors people need to know about their 401k.  The first is that employer contributions do not count towards your limit.  An employer can match up to 6% of your total yearly compensation in your 401k.  This means that just because you’re limited to $16,500 a year as a young worker, that doesn’t mean you can’t end up with more.  The employer contribution is in addition to whatever you contribute, so take advantage of any matching program.

Understanding the contribution limits on your 401k account will help you be able to more effectively plan for the ideal retirement and budget accordingly.

Filed under: 401k Info

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