Limits on Employee Contributions to Retirement PlansEmployer retirement plans enable you to invest a large portion of your compensation each year into a tax-deferred account, where your money can continue to grow in the tax-sheltered account. Your employer sometimes can also contribute to this account.
The Internal Revenue Code specifies different maximum annual contributions for both employees and employers. Here are the maximum allowable contributions for employees:
- If you participate in a 401(k) plan or 403(b) plan, you may elect to contribute up to the smaller of $16,500 or 100 percent of your compensation for 2009 (up from $15,500 for 2008). That figure will be adjusted for inflation each year thereafter. The law now allows an additional, "catch-up" contribution each year ($5,500 for 2009 and $5,000 for 2008) by plan participants age 50 and above.
- If your employer offers a SIMPLE IRA and you do not participate in other employer plans, you may contribute a maximum of $11,500 for 2009 (up from $10,500 for 2008). The 2001 law also allows taxpayers age 50 and above to make a "catch-up" contribution each year—allowing an additional $2,500 for 2008/2009. These amounts are subject to annual adjustment for inflation.
- If you participate in a SEP IRA plan created after 1996, your employer—but not you—may make contributions to your plan. Pre-1997 SEPs, however, can continue to accept contributions, in the form of employee salary reductions of up to $16,500 (indexed for inflation). The total contribution allowed to a SEP IRA will increase to the lesser of $49,000 in 2009 (up from $46,000 in 2008) or 100 percent of compensation actually paid.
- If you participate in a Keogh plan, you generally may not make contributions in addition to those made by your employer.
Keeping track of your allowable contributions enables you to take full advantage of your employer retirement plan benefits.