Maximum Before Tax Contribution 401k

Maximum Before Tax Contribution 401k

Every year, the IRS sets a maximum limit that an individual can contribute to the 401K plan. In addition, the maximum pre-tax amount that can be contributed is also decided by the IRS. This amount changes every year.

For instance, in the year 2005, the maximum limit for pre-tax contributions was $14000. For the next year, it was $15000. The limits are based on the Economic Growth and Tax Relief Reconciliation Act released in the year 2001.

The contribution limit to the 401K plan is the same even if the individual has multiple income sources. This means that even if a person works for more than one employer, the limit set by IRS would not change.

In the case of catch-up contributions which are taken into account if a person crosses the age of 50 years, an additional amount of $4000 was allowed in the year 2005 and increased to $5000 in 2006.

After 2006, the limits are subject to COLA (Cost Of Living Adjustments). In order to avoid any discrimination with people who are highly paid, if the employees pre-tax contributions do not exceed the plan contribution limit or annual dollar limit of the IRS, the catch-up contributions is also treated as regular pre-tax contributions.

The factors that are taken into account for arriving at the maximum contribution limit to the 401K account include salary, plan and the guidelines of the government.

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