How Much Can I Contribute to My 401K Plan

Employees who are not familiar with the employer-sponsored retirement plan known as a 401k or who decide not to contribute to a 401k are missing out on an opportunity to prepare for retirement and take advantage of this pre-tax investment process. However, you also can't go overboard and put too much in the plan, either. This guide can help you better understand how much a 401k can do for you.

What is a 401K?
A 401k plan is an employer-sponsored retirement plan that withholds contributions from the employee's paycheck before taxes are figured on the amount. The contributions are invested into the group plan and allowed to grow until the employee reaches retirement age. Often, companies will match a certain part of the employee contributions. For example, if an employee contributes $200 per paycheck, the company may match 6 percent of all employee contributions. For every bit the employee puts into the investment, the company puts in an additional percentage.

Employer Contribution Limits
Each year, there are adjustments to how much money an employee can choose to contribute. This can be different from plan to plan. Most plans will not allow more than 10 percent of an employee's salary to go toward a 401k plan. For example, if an employee earned $60,000 per year, the maximum contributions allowed would be $6,000 annually. Typically, an employer's contribution limit will range from 4 to 6 percent of the employee's salary.

Plan Contribution Limits
The 401k plan is structured so that there is a cap on the amount that someone can contribute. As of 2009, the maximum that a person under age 49 could contribute per year was $16,500. The cap is higher for workers who are 50 and older. As of 2009, the cap was at $22,000. The amount is adjusted every year or so to account for inflation. Note that any 401k rollover amount does not affect the maximum contribution amount for the year.

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