401k Contribution Limits Are Designed To Increase Annually

Fewer middle-class people enjoy financial security these days. Saving enough for a comfortable retirement seems like a pipe dream for those facing the economic burden of layoffs or extended unemployment. Though times are difficult, working for a company that encourage employees to participate in retirement savings plans is still a good choice whenever possible, even with current 401k contribution limits.

This retirement savings strategy was created by the U. S. Government in 1981. Originally designed to augment the support of the traditional company pension, it has now basically replaced those funds in many cases. Employees are often encouraged to contribute on a regular basis to a 401k plan, usually in the form of a special pre-tax payroll deduction.

There are a number of advantages to that participation. The money contributed is invested, becomes portable when jobs change, and in dire circumstances can even be used as a personal emergency fund. It’s important to understand the 401k rollover options before transferring these funds, however. Participating employees also have a wide range of choices concerning specific investment of their assets. The majority of savers allow professionals to manage the details, but those that have the desire to make their own investments, and who understand the risks, may do so. Investment choices typically represent a variety of mutual fund sub accounts in a number of different asset classes. 401k plans also offer tax deferred growth which comes with some significant benefits.

The big advantage associated with these 401k retirement plans is that many companies match employee payroll deducted amounts. Participating firms supporting this methodology are not only able to attract and retain talented workers, but receive tax breaks for matching employee savings. And, because of portability, they usually are not stuck with expensive administration responsibilities when an employee leaves.

A small amount contributed by an employee to this type of plan on a regular basis can grow into a substantial sum. Because of the excellent track record of those plans, and based on existing government rules, companies are required to control the amount that is deducted, as well as matched. Historically, those benchmarks lagged behind other economic factors such as inflation, and until 2001 actually could not provide much of a secure retirement.

Today, however, the established 401k contribution limits seem to have caught up with the times. As recently as 2007, the individual pre-tax limit established by the IRS was $15,500, growing to a minimum of $16,500 in 2012, with $500 incremental allowances made for the cost of lending index. Those workers fortunate enough to be classified as "highly compensated" are subject to regulations based on the employer's overall rate of participation in the plan.

While some firms follow a limit pegged at 6% of the employee's contributions, others offer higher matching amounts. They are structurally limited by the amount the employee opts to save each pay period, and may be as high as 50%, for example, of the amount an employee has chosen. This means that a worker dedicating $8000 to a plan each year would receive another $4000 from the company, for a total of $12000. This is a very attractive deal for the employee, whom receives an immediate return on invest of 50%. In today’s market environment it could take many years to see those kind of returns. This works out great for the employer too, as they are providing a monetary incentive to stay with their institution.

When invested well, the return on this type of savings is excellent, especially when compared to traditional savings accounts. For people who have procrastinated, sometimes with very good reasons, there are provisions made for additional allowed amounts, in order to help that person catch up. 401k contribution limits are only one part of this complex system, and for those seeking more information, a company plan administrator is the best source.