401K Maximum Contribution
So just what is the maximum contribution that you can put into your 401K account? It depends on the government guidelines, your salary, and your plan. Your contribution limit is the lower of the maximum amount that your employer allows as a percentage of your pay or the government maximum allowed amount. The maximum government amount for 2008 was $15,500 and for 2009 it is $16,500.
That was a little confusing so let’s do an example. Your employer allows a 10% contribution and you made $50,000. You would only be allowed to contribute $5,000. Obviously the $16,500 maximum is for higher paid employess.
401K Maximum Contribution Exceptions
If you are at least 50 years old you may be eligible for “catch-up contributions” if your employer allows. The 2008 maximum for this was $5,000 and $5,500 for 2009.
If yor employer matches contributions they are not counted towards your 401K maximum contributions, up to 6%.
401K Maximum Contribution: Why should you do it?
Why in the world some people don’t do this, I will never know. Let’s take a look at a scenario. I will try to keep it simple and easy to understand. Let’s say that you contribute $100 to your 401K plan. Let’s assume that you are in the 25% tax rate. Right away it only cost you $75 to put that $100 away, because it was pretax money. So it was exempt from those taxes. So we will say that you made 25% interest. Wow, not bad. Now let’s assume that you made a good choice for your investment vehicle and you made 10%. Ummm, up to 35%. Now let’s assume that you are in an employer matching 401K plan. That $100 turned into $200, plus another 10% interest earned on that money. Looks like an extra 110% earned. Is that 145% interest? Well there are other considerations. You will have to pay taxes on that money. But it will be when you are retired and in a much lower tax bracket. And you will have used that money to earn money.
This was a very rough scenario, and these numbers may not be exactly correct, but they will make you think of what you are giving up! Where I worked the employer only matched 3%, but hey, that is a 3% raise in my eyes. AND WE HAD PEOPLE WHO WERE NOT IN THE PLAN! To me that is like your employer trying to give you a 3% raise (actually more if you consider the other benefits) and you are saying “no thanks”.
Everyone needs to put some money away for the future. The 401K is a great vehicle for doing that. You put the money away before you see it. Most of the time you will not miss it. And maybe you don’t feel comfortable with the maximum contribution right away, but get started. You can aways increase your contribution later. The most important thing is to get started!