401k limits

401K contribution limits for 2010 are $16,500 for employees. Employer contributions are limited to 6% of the employee’s pre-tax compensation under the 401k rules.  If you are 50 and older, you can contribute an addition $5,500 for a total of $22,000.

For example, if you earned $100,000, you could contribute a maximum of $16,500 in 2010 before taxes and your employer could contribute up to another $6,000 for a total of $22,500 in money going into your 401K. Those are the 401K limits for people under 50.

Let’s assume that you are over the age of 50. You could contribute the maximum of $16,500 plus an additional $5,500 bringing the total of $22,000 contributed on a pre-tax basis according to the 401k rules.  If your employer also contributed the maximum of $6,000, you could have a total of $28,000 put into your account in one year. Those are the 401K limits for people over 50.

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Many people worry about contributing to their 401K.  Your employer can tell you when you vest and what your 401k contribution limits are. Many people think that can’t afford to contribute. They worry that they won’t be able to live on the lesser amount of income. What they don’t realize is that if they contribute say, for example, $10,000, and they make $50,000 a year: they only pay tax on $40,000 not $50,000. so the tax savings is giving you back some money to make up for that $10,000 contribution. How much? Well, that depends on your tax bracket. Obviously, the higher the tax bracket that you are in, the more advantage you get. As your earnings grow so does your 401K balance. To get the maximum 401K balance, add your bonuses and increased earnings to the amount you contribute.

Hint! Hint!- Don’t ever get a tax refund– that’s a interest free loan to the government. Have your tax preparer give you the extra monthly cash by changing your withholding exemptions to the proper amount to adjust for your 401K contributions.

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Ok- everyone wants their 401K account to go up in value all of the time- right? Well, fat chance. Markets go up and down all the time and lately it’s more down than up. So hang in there because what goes around comes around again and again. Here are some tips to smooth out the bumps and get the maximum 401K values you can:

Diversify across categories. What’s a category? It like stocks, bonds and cash.

Diversify across asset classes. What’s an asset class? It is like large cap, mid cap and small cap could be under your stock category.

Diversify across asset styles. Let’s say you have a stock category and you have a large cap stock fund in it. You could further diversify into a large cap value stock fund and a large cap growth stock fund.

Keep your costs low. Use only no-load mutual funds or index funds.

Get an asset allocation and stick with it. What’s an asset allocation? It is the percentages that you put into each asset class. Say you want to put 60% into stock. You could put 20% into large cap, 20% into mid-cap and 20% into small cap.The higher you put into stocks, the higher the risk and volatility of your portfolio.

Rebalance once a year. That means if you put 60% into stocks at the beginning of the year and it grows to 65% at the end of the year, take that 5% and add it to another class that is doing poorly. You will be constantly selling high and buying low. Guess what? That makes you money not limit your gains.

Stick with it! No matter what Fox News or famous Joe Money blogger tells you, if you keep moving in and out of funds, you are gambling -not the right way to get maximum 401K values.

Get the 401k maximum balance going for you right now.

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You may think that you can make more money by investing outside of your 401K, but that is misleading. If you are eligible to contribute to your 401K plan then your first investment dollars should be an option within that plan. Don’t be tempted by short term gains elsewhere until you have contributed up to your contributions limits. Here are three reasons why:

1. Tax Savings.You contribute money into your plan with pre-tax dollars. That is a huge advantage in investing because more of every dollar you earn goes into your plan for your benefit.

2. Tax Deferral. All the investment income- interest, dividends, and capital gain distributions are not taxed within your 401K plan. That means your money will grow much faster without tax on the investment earnings.

3. Automatic Increase in Contributions. If you are putting a percentage of your salary into your 401K plan, then as you make more money your contributions to your plan increases. When you contribute more, you have the potential to accumulate more. You can find more ways to maximize your 401K at http://401Kmaximum.org

When you look at the powerful advantages above, it is hard to find any investment that can build wealth as quickly as a tax deferred plan like the 401K. Of course, there will always be high risk, high reward investments around who will tempt you to invest. With the 401K plan, even if you choose poor performing investments, over time you will have done better than if you had those same investments outside of the 401K plan. By remembering the 3 reasons above, you will stick to contributing the maximum to your 401K plan and watch the money pile up.

2009© Fern Alix-LaRocca CFP® All Rights Reserved

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