401K Limits for 2009

401k for retirement A 401(k) is a tax-deferred savings account that allows you to deposit pre-tax wages. The money remains in your 401(k) until you turn 59 ½ (55 in some cases). There are a few other instances where early 401(k) withdrawal is allowed: your employment is terminated, you become disabled, you retire, or you pass away. If you withdraw from your 401(k) prematurely, you face a 10% early withdrawal penalty.

Many companies have a 401(k) matching program where the employer deposits a certain amount of money into your 401(k) based on the amount you deposit. You may have to work for the company for a certain period of time before the company starts matching your 401(k) contributions.

Every year, since the Economic Growth and Tax Relief Reconciliation Act of 2001, the IRS has modified maximum 401(k) contribution limits. Overall, the max contribution for 2009 is higher than for 2008.

401(k) Contribution Limits

The Internal Revenue Service (IRS) limits the amount you and your employer can contribute to your 401(k). These are the contribution limits for 2009:

$16,500 if you are 49 or younger
$22,000 if you are 50 and older

The contribution limits are per taxpayer, so if you are a married couple under 50, as a couple you could contribute a total of $33,000 to your separate 401(k) plans ($44,000 for couples over 50). Unfortunately, if you have multiple 401(k) accounts, you can only contribute a grand total of $16,500 across them.

Video: What are 401k benefits?

golden 401k nest egg The SIMPLE 401(k) contribution limit for 2009 is $11,500. A SIMPLE 401(k) is a retirement plan for small businesses with fewer than 100 employees. Unlike a traditional 401(k), the employer is required to make contributions to the employee's SIMPLE 401(k) plan. In addition, employees are fully vested in all employer contributions as soon as they are made. Each year, traditional 401(k) plans must pass tests that show the plans don't favor highly paid employees. SIMPLE 401(k) plans are not subject to these tests.

The total of your and your employer's contribution limits cannot exceed 100% of your compensation or $49,000 whichever is lower.

If you are self employed, you can contribute to a SEP Plan. The limit is $49,000 or 25% of your compensation whichever is lower. However, if you make contributions to another type of retirement account, like a 401(k), the maximum SEP plan contribution amount is decreased.

401(k) Catch-Up Contributions

If you reach age 50 before the calendar year is over, you can make additional contributions to your 401(k). Here are the 2009 catch-up contribution limits:

Traditional or safe harbor 401(k) plan: $5,500
SIMPLE 401(k) plan is $2,500

According to the IRS, after 2009, catch-up contribution limits will be subject to cost-of-living increases.

Video: 401(k) Basics - Save money for retirement

401(k) Contribution Tips

Resist the temptation to borrow from your 401(k). You can't contribute until you pay back the loan. If your employer does matching you're missing out on precious retirement money. The loan will be due immediately if you leave your job. If you can't pay back the loan, you face early withdrawal penalties and an increase in your taxable income for that year.
Max out your 401(k), especially if your employer does 100% matching. You'll lower you taxable income and get extra retirement money from your employer.
Make informed choices about your 401(k) investments. You have the freedom to make changes to your 401(k) portfolio. Never invest in something you don't understand. Find out what investments are available and research them. Don't hesitate to enlist the help of a financial planner or family member who knows about finances.
Start contributing as soon as you're able. You can legally begin contributing to your employer's 401(k) plan after you've given one year of service. As your one year anniversary approaches, talk to someone in human resources or payroll about starting your 401(k) contributions.