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).