2012 401k Contribution Limits And Rules

In the past we've talked about which retirement accounts are best for different situations, and we looked at reasons why you might want to invest in a Roth IRA, 401k, Roth 401k or A Traditional IRA.  Depending on your age, your income, your current and future tax situations and a variety of other factors, you may want to look at investing in one or several of these account types.

At our house we love the fact that the Roth IRA is done with post-tax dollars because it means that we'll never have to pay taxes on the contributions or earnings.  On the other hand, Who knows what our tax situation will be in retirement versus now – so it pays to do a bit of retirement account diversification. So we're investing in a Roth account as well as in our 401k.

This week the IRS came out with the adjusted pension plan limitations for 2012, so I thought I'd take a look at some of the changes in the 401k rules, regulations and contribution limits.

How Did The 401(k) Start?

Background on the 401k retirement account type from Wikipedia:

A 401(k) is a type of retirement savings account in the United States, which takes its name from subsection 401(k) of the Internal Revenue Code. 401(k)s were first widely adopted as retirement plans for American workers, beginning in the 1980s. The 401(k) emerged as an alternative to the traditional retirement pension, which was paid by employers. Employer contributions with the 401(k) can vary, but in general the 401(k) had the effect of shifting the burden for retirement savings to workers themselves. In 2011, about 60% of American households nearing retirement age have 401(k)-type accounts.

401(k) Contribution Limits

In 2011 the 401k contribution limits remain unchanged from 2010 and the limit of $16,500 remained in place .   This year there was a cost of living adjustment to the 401k contribution limits, and people who use or have 401(k), 403(b), 457 and the government's Thrift Savings Plan saw an increase of $500 to the limit.  That means that next year you can contribute up to $17,000 in your account.

Here is a look at the maximum yearly contribution for the 401k account type every year since 2007.

Year	401k Contribution Limit
2007	$15,500
2008	$15,500
2009	$16,500
2010	$16,500
2011	$16,500
2012	$17,000

Since 2007 we've seen an increase of $1500 to contribution limits.   Since there was an increase for 2012, I wouldn't expect to see one for next year.

401k Catch-Up Contribution Limits

If you're 50 years or older by the end of 2012, you can make catch up contributions to your 401k account.  Not all plans allow for this, but if yours does, you can make an additional contribution of $5,500 on top of the $17,000 limit, for a total of $22,500.

Here are the  401k catch-up contribution limits for 2012.

Year	401k Catch-Up Contribution Limit
2007	$5000
2008	$5000
2009	$5500
2010	$5500
2011	$5500
2012	$5500

401(k) Employer Contribution Limits

There are separate contribution limits for employers in case they decide to add to your account.  Currently an employer can make a contribution of up to 6% of the employee's salary.

Do Employer Matching Contributions Affect Your Limit?

If you're employer is giving contributions or matching contributions, will those contributions count against your limit?  Thankfully it doesn't, as the employer contribution limit is a separate limit.

Example: If someone makes $100,000 in pre-tax compensation, and they and their employer both contribute the maximum, they could have $17,000 contributed by the employee, and $6,000 by the employer for a total of $23,000. If they're over 50 they could also make catch up contributions for a total of $28,500.

Maximum Contribution Limits

There are other things you may need to consider with your company's 401(k) plan. For example, if you're a highly compensated individual at your company you may be subject to separate contribution limits. Some plans may allow you to make post tax contributions to your account. Currently the max you can contribute to a 401(k) plan in 2012 is $50,000 or 100% of your compensation, whichever is less.

Are you currently contributing to a 401(k) plan through your work? Are you contributing to the maximum? Do you get a company match? Tell us what you think about the limits, and if you'll be able to reach them.