It is important for an employee to be aware that there is a maximum 401k annual contribution. You want to maximize your 401k savings but also avoid exceeding the limit (which could result in additional taxes and penalties). This value may change every year, and for the year 2009, the value has been increased by $1,000 for workers who are less than 50 years old. This amount was raised by $1,500 for those who are 50 years of age or more. The result is that the maximum 401k annual contribution for those who are younger than 50 has become $16,500. On the other hand, those who are at least 50 years of age can contribute up to $22,000 per year because they are allowed additional mitigating contributions amounting to $5,500.

The 401k plans have to be sponsored by the employer, who may choose to match the worker’s contributions up to a certain amount. Therefore, if you only want to contribute up to the maximum amount that your employer agrees to match, then your maximum 401k annual contribution will be this amount. 401k plans may also be sponsored by non-profit organizations, which are exempted from paying taxes.

The IRS considers a 401k plan to be a defined contribution plan wherein the contribution is automatically deducted from the worker’s salary. The employee has the liberty to specify the percentage of his pay that will go into the 401k plan. The amount that is contributed to the 401k plan is not taxed during the year it has been earned. Rather, the income tax for the contributions will only be collected when the employee withdraws the amount from the plan. Also, any amount earned as a result of investing the contributions will not be taxed initially, but instead will be taxed upon its withdrawal during retirement when income levels and taxable levels should be lower.

The primary aim of a 401k plan is to make sure that an employee has some funds to fall back on when he retires. The amount that is being accumulated can be invested into a particular type of investment that the worker selects. Typical choices for investment include mutual funds that may focus on stocks, bonds, and other investments.

Being aware of the maximum 401k annual contribution ensures that an employee can optimize his savings in his 401k plan. For example, if he is less than 50 years of age, he can obtain the maximum percentage of his salary that he can contribute to 401k by dividing $16,500 by his annual salary. The resulting percentage is applied to his regular paycheck to make sure that he optimizes the benefits.

Another important advantage is, of course, to ensure that a worker does not exceed the maximum 401k annual contribution. This is significant because it helps the employee avoid paying penalties for surpassing the limit. Moreover, any excess amounts are subject to income tax. Many times these limits are automatically monitored by the employer’s HR department, but you should double check and be aware of them.

The good news for 2009 is that the contribution caps previously set for 401k plans have been increased. The maximum 401k annual contribution in 2008 was $15,500 for those who were less than 50 years old, and $20,500 for those who are 50 years old and above because they are allowed an additional $5,000 for mitigating contributions. Both of these limits have been raised for 2009. Before we continue, let us define what 401k plans are.

The purpose of a 401k plan is to encourage an employee in the United States to regularly set aside an amount of money for retirement. The accumulated amount is invested, and the income tax for the money earned is not immediately taxed. The saved amount and its earnings will only be taxed when the worker withdraws the sum upon retirement (in the case of a ROTH IRA type plan).

The 401k plans are usually sponsored by employers, and the employer can, at his discretion, match the amount being contributed by the worker. In the most common 401k plan, the worker has the ability to choose the kind of investment for his contributions. These choices usually include mutual funds that focus on bonds, stocks, and some money market investments.

There is a maximum 401k annual contribution that qualifies for the deferred tax benefit. If the worker happens to exceed this amount, he has to withdraw this amount on or before April 15 of the succeeding year. Excess contributions may happen if the worker has changed employers during the middle of the year and the current employer is not knowledgeable about applying the contribution caps. If the surplus is not corrected in time, the worker might have to pay taxes for the excess amount, including some penalties.

For 2009, the maximum 401k annual contribution has been increased by $1,000 to $16,500 for those who are less than 50 years old. The additional $1,000 will also apply to those who are 50 years or more. Their mitigating contribution has also been increased by $500, so that workers who are 50 years old and above have a total contribution limit of $22,000 per year.

Furthermore, the increase in contribution limits does not only apply to 401k plans, but also to 403b, 401a, 403b, and 457 plans, including the Thrift Savings Plan. Thus, the limits are also applicable to various retirement plans found in the tax code. They are also relevant for the Thrift Savings Plan, which is the 401k plan for government employees. These limits also apply to the traditional and Roth versions of the 401k plan.

Financial experts advise employees to maximize their contributions. They can obtain the percentage of their monthly salary that should go into the 401k plans by dividing the limit by their total salary per month. The resulting percentage should be applied to every paycheck to ensure that they are maximizing their contributions. However, if they think that they cannot afford the maximum amount, they should at least try to contribute the maximum amount that their employers are willing to match (if available).

The annual 401k contribution limit has now been given additional attention by the federal government. Employees who were previously unenthusiastic about their 401k plans can now breathe a sigh of relief, due to recent amendments to the Restoring Earnings to Lift Individuals and Empower Families (RELIEF) Act of 2001. The RELIEF Act wants to encourage workers to increase the amounts that they can accumulate in the 401k retirement account.

Before the RELIEF Act of 2001, there has been very little improvement made to the annual 401k contribution limit. It had been increasing every year at a sluggish pace, so even employees who had contributed steadily to the account failed to envision accumulating enough for a comfortable retirement.

First, let us define the nature of 401k plans before we explain the significance of the RELIEF Act, in terms of the annual 401k contribution limit. From the point of view of the IRS, the 401k plan is a contribution plan in which a certain percentage of the worker’s salary is deducted and provided as payment to the plan. It is not a defined benefit plan because the amount that the employee will receive at retirement is unspecified. Rather, the worker specifies the percentage of his salary that will go into the plan, and he or she will be able to chose where the money will be invested. The amount that he will receive at retirement will depend on the accumulated contributions plus the earnings of these monthly deductions.

An additional benefit for the 401k plan is that the amount set aside is taxed immediately, and so are any earnings as a result of investing the money. The income tax will only be applied at the time when the employee withdraws the money at retirement.

However, there is an annual 401k contribution limit that restricts the amount that an employee would be able to accumulate for his retirement. In the event that he exceeds this value, he might be liable for the payment of additional taxes and penalties. If the employee notices that he has surpassed this limit, he has until April 15 of the next year to withdraw the excess amount.

The good news is that starting in 2004, the annual 401k contribution limit has been rising at a faster rate. In 2004, it became $13,000 and in 2005, it reached $14,000. In 2006, the limit was raised to $15,000 and in 2007, it was increased to $15,000. In 2009, it was raised to $16,500, and in 2010, it will be adjusted based on the index for inflation in increments of $500. These values are applicable for workers who are less than 50 years old. Those who are 50 years of age or more have an additional $5,000 as mitigating contribution. In 2009, the catch-up contribution was increased to $5,500, so a 50-year-old worker can contribute up to $22,000 every year.

For an employee to optimize his contributions, he can compute his maximum percentage, which is obtained by dividing his allowable maximum contribution by his annual salary. This percentage should then be applied to his salary every payday.