Truth and Important to Know about 401k Self Employed

Truth and Important to Know about 401k Self Employed

401k contribution limits including catch up 401k limits, pre-tax and total contributions limits, as well as the limits that apply to highly-compensated employees.

401K Contribution Limits

The recent changes in 401k contribution limits are a bit of good news for investors willing to leverage these plans in their retirement portfolio. Starting a couple of years ago, the 401k contribution limits started to jump up quickly and in 2010 will continue to be indexed to inflation.

Catch-up 401k contributions.

• For tax years beginning after 2001, a plan may permit participants who are age 50 or over at the end of the calendar year to make additional elective deferral contributions.
• These additional contributions (commonly referred to as catch-up 401k contributions) are not subject to the general limits that apply to 401(k) plans.
• An employer is not required to provide for catch-up 401kcontributions in any of its plans. However, if your plan does allow catch-up 401k contributions, it must allow all eligible participants to make the same election with respect to catch-up contributions.

1. If you participate in a traditional or safe harbor 401(k) plan and you are age 50 or older:
2. The elective deferral limit increases by $5,000 for 2008 and $5,500 for 2009.
3. The limit is subject to cost-of-living increases after 2009.
4. If you participate in a SIMPLE 401(k) plan and you are age 50 or older:
5. The elective deferral limit increases by $2,500 for 2008 and 2009.
6. The limit is subject to cost-of-living increases after 2009.
7. The catch-up 401k contribution you can make for a year cannot exceed the lesser of the following amounts:
8. The catch-up contribution limit, above, or
9. The excess of your compensation over the elective deferrals that are not catch-up 401k contributions.

Secret of 401k Contributions Plan

If the total contributed to the plan is in excess of the amount allowed under the ADP test, then any excess contributions must be either distributed back to the employee or re-characterized as after-tax employee contributions.

• For example, the contribution can be distributed to an employee, and then contributed by the employee right back into the plan.

In addition to the pre-tax or tax-deferred contributions you can make to your 401k plan, your plan may also allow employees to make after tax-contributions. When after-tax contributions are added to pre-tax contributions, this becomes your total 401k contribution - which also has a limit.

• In 2009, the total that can be contributed to a 401k plan is $49,000 or 100% of your compensation - whichever is less.
  

• In 2010, this total 401k contribution limit will be indexed to inflation and can move up in $1,000 increments. In 2008, the total that could be contributed was $46,000.