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An important aspect of investing is to always be aware of what amount you are allowed to contribute to your 401k account each year. 401k contribution limits change each year and there are two different 401k contribution limits you need to be aware of. The United States government sets the maximum limit allowable and your employer may also set their own 401k limits for their employees.

In the last couple of years, the U.S. Government has begun to understand the importance of saving for retirement and they realize that the 401k investment plan may be the best retirement vehicle for most wage earners in America. In recent years, the government has started to increase the limits to help individuals save for retirement. Realizing that social security may not be a viable option in the future, the government and companies are encouraging workers to save for their retirements by making 401k contributions.

Government Imposed 401k Contribution Limits versus Employer Imposed 401k Contribution Limits

The U.S. government puts out a list showcasing the maximum amount you can contribute to your 401k plan for that year. Employers may also set a maximum limit of what is allowed for their employees. For example, your employer might limit 401k contributions to a maximum limit of 10% of an employee’s salary. That means that an employee that earns $50,000 a year can effectively max their contribution out at $5,000. However an employee who earns $200,000 a year would not be eligible to max out at 10% ($20,000) because the 2007 401k contribution limit imposed by the government is $15,500.

Retirement investors should first consider what amount of 401k contributions is allowed by their employer and then compare that with the amount allowed by the U.S. government.

Catch-up Contributions

If you are 50 years of age or older, you may want to check with your employer to see if they offer “catch-up” contributions in your 401k plan. If they do, this will allow you to contribute up to the maximum your employer’s plan allows as long as this amount does not exceed the limits that have been imposed by the government.

Below are the maximum 401k contribution limits as well as the maximum Catch-up Contribution limits for 2006, 2007, and 2008.

2006 401k Contribution Limit: $15,000
2006 Catch-Up Contribution Limit (only for those over 50 years old): $5,000

2007 401k Contribution Limit: $15,500
2007 Catch-Up Contribution Limit (only for those over 50 years old): $5,000

2008 401k Contribution Limit: $16,000
2007 Catch-Up Contribution Limit (only for those over 50 years old): $5,000

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