How much can I contribute to my 401k?

That’s a common question.  We’ve recently discussed the purpose of your 401k plan and have provided some basic advice with respect to its utilization.  Today, we’ll continue our look at 401k basics by discussing contribution limits.

Even though 401k’s are increasingly being used as a primary means of funding one’s retirement, the government isn’t willing to let you stick every last penny you have into an account.  They don’t want people utilizing the favorable rules associated with the accounts as a means of skirting legitimate tax liabilities, so there is a cap on contributions.

As recently as this fall, there was some concern that the maximum contribution level would be reduced.  That’s because the existing law relies on a formula based on factors including the inflation rate to set the mark.  The indicators pushed to a a required reduction in contributions.  However, Congress opted to intercede.  They pre-empted the formula and maintained the 2009 cap instead.

That means that annual contributions are capped at $16,500 per year for an individual employee.

There is an exception for those who are over fifty years old who are trying to “make up” for past years when they failed to reach contribution limits.  If you fall into that group, you’re allowed to put an additional $5,500 into your 401k plan.  GoodFinancialCents explains:

For those that got a late start saving for their retirement, the 2009 401k contribution limits have increased the “catch up” provision as well.  For those over the age of 50, you are allowed the $16,500 plus a “catch up” of $5,500 for a total contribution of $22,000.  For all the procrastinators out there, this gives them an excellent opportunity to grow their retirement nest egg to a respectable level.

As you’d probably guess from any government-run program, things aren’t always quite that simple.  There are a number of specific instances that can have an impact on contribution maximums.  401kPlanning.org offers an overview of multiple threshold and deferral limits.  So, while the core answer to “how much can I contribute to my 401k” is $16,500, you should look at the “fine print” to see if your circumstances change anything.

It’s also worth noting that the $16,500 limit applies only to your personal contribution.  It does not apply to any matching contribution that your employer may make.  20-Something Finance explains:

The IRS maximum 401(k) contribution is how much you can personally contribute to your 401(k) during the year. What your employer wants to contribute is entirely up to them – but the max on total contributions (employee plus employer) to your 401(k) is $49,000 (or 100% of your salary, whichever is less). Technically, this means that your employer could contribute up to $32,500, if they wanted to, and it would not count against your $16,500 personal contribution maximum.

So, now you know how much money you can sock away in your 401k for 2010.  Considering the tax benefits of participation and the importance of saving for retirement, you should strive to come as close as you can to that $16,500 cap.  If you doubt how much difference a slightly more aggressive approach to feeding your 401k can make, run through a few different scenarios with a 401k calculator like the one provided by BankRate.  You’ll be amazed at home much difference a slightly higher commitment level can make over time.

However, you don’t want to treat those numbers as absolute truths.  Remember, the annual contribution levels can change on an annual basis and your “mileage may vary” with respect to actual interest earnings.