How to Contribute to 401k

If you're new here and would like to be notified the next time I write something, you may want to subscribe to my RSS feed. Thanks for Reading!


If you want to be notified the next time I write something, sign up for email alerts or subscribe to the RSS feed. Thanks for reading.

In your contribution to your 401k through a pre-tax salary deferral, there is a maximum limit which is called the “401 g limit”. The reason for the required limit is due to the fact that one of the many benefits that you can get from a 401 k plan is savings on your income taxes. This is because the pre-tax contributions are considered as deductible to your annual income taxes which would thereby lessen the amount of taxes that you pay on a yearly basis. This is one of the long term benefits that you can get when you maintain your 401k contributions within its proper limits.

Step 1

Know the maximum limits of your contributions - The rules provide that for the year 2007, the maximum contribution is $15, 500 until the year 2008. After the year 2008, the limit will be indexed based on inflation and will be increased in increments of $500. For those employees who are already 50 years old or over, they are allowed to make the so called pre-tax “catch-up” contributions up to $5000 which may be adjusted also for inflation as well as in increments of $500. For those who are into eligible plans, they have the option to have either a pre-tax contribution or an after-tax Roth 401k contribution or even a mix of both. However, the rules provide that all the 401k contributions should not exceed the maximum contribution amount.

Step 2

What to do when contribution exceeds the pre-tax maximum limit - As mentioned, there is a limit on your pre-tax contributions to your 401 k account for a certain year. This requires that if your contributions exceed the limit, you must withdraw the excess amount before the 15th of April the following year. This procedure must be done, otherwise the employee will have to pay for taxes and penalties for the excess. This is because an excess contribution is considered as a non-qualified contribution which cannot be considered part of the qualified 401k retirement plan.

Step 3

Check if the excess contribution is made by the employer - A contribution in the 401k account that is made by an employer which when added to the contributions of the employee may increase the amount to more than the specified limit but does not violate the regulatory limit. Under the rules, the limits for contributions made by an employer and employee are at $44,000 for the year 2006, $45,000 for the year 2007, and $46,000 for the year 2008.

Step 4

If you are a government employer in the United States, you are at present not permitted to offer 401k plans to your employers unless you have set up these plans prior to May of 1986. The government employers cannot set up this kind of plan but they can do another set up which is the 457g.

Step 5

For self employed individuals, you are still allowed to make contributions provided that the contributions do not exceed that of the contributions for employers and employees.

StumbleUpon It!

If you enjoyed this post, make sure you subscribe to my RSS feed!

Related Posts

Filed Under 401k 

Comments

Got something to say?