Are There Any 401K Contribution Limits

401k plan is an employer sponsored retirement plan. This plan offers benefits of tax deferred contributions and help an individual save for after retirement days. As this is an employer sponsored plan, investment options are also provided by the employer only.

In this plan, the maximum contributions depend on three factors the salary of the employee, the plan chosen and governmental regulations. Since the contributions are made from pre-taxed income and are deducted by the employer itself, the employer can put a ceiling on the maximum amount that an employee can contribute. This limit varies from employer to employer as it is at the sole discretion of the employer.

The government has its own set of rules in place to regulate the maximum amount that an individual can contribute to this account. The contribution limit set by the government is revised at regular rates due to factors like inflation. Maximum contribution limits set by the government on 401k plan for the past few years are as follows-

* 2004: $13,000 * 2005: $14,000 * 2006: $15,000 * 2007: $15,500

After 2006, the government plans to decide the next limit on the basis of an individual's cost of living. There are certain catch up contribution limits also. An employee can contribute more than other people after he/she reaches the age of 50. These contributions are called catch up contributions. These are also regulated by the government. A brief overview of catch up limits over the past few years is as follows-

* 2004: $3,000 * 2005: $4,000 * 2006: $5,000 * 2007: $5,500

An employer can also contribute to the employees 401k plan. However, these matching contributions also have a certain limit. An employer can contribute a maximum of 6% to the employee's salary.

Employer contributions are subject to certain regulations in case of highly compensated employees. An employer can not contribute more than 125% of the average deferral percentage (also known as ADP) in their account. An ADP test has to be run to check any discrepancies in the employer's contribution. These extra contributions, if made, have to be reported back as taxable income by the concerned employee.

An employee can also contribute after tax deductions to one's 401k plans. Pre taxed and post taxed contributions are then together referred to as an employee's 40k deductions. A certain maximum limit has been set up in this regard also. For 2006, this limit was $44,000 and for 2007 this limit has been increased to $45,000.

Therefore, before making contributions to a 401k plan, an individual should check out all applicable contribution limits. At times, under a certain provision, an employee can contribute more but another limit might restrict his maximum contribution.