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.