A 401k account has been a popular investment option for retirement, as the burden of retirement savings has steadily shifted from corporations to employees over the years. An employer sponsored 401k plan allows you to grow your funds tax-free until their withdrawal when your turn 59½.
With a 401k plan, an employer can assist their employees in saving for retirement, and also reduce their taxable income. An employer may also elect to match an employee’s contribution to their 401k account.
There are several issues regarding investing in a 401k plan. Some issues concerning investing in these retirement accounts are tax benefits, withdrawal limits, and your maximum 401k contribution. It is also important to carefully consider your investment options offered in your employer’s plan as well as your time frame for investing and risk-tolerance.
The retirement specialists at online brokerage ETrade can assist you in deciding what avenue is best for you and your unique financial situation. As each investor requires an individual approach to asset allocation, as well as other considerations, it is advised that you consult with a financial adviser prior to committing any capital.
Maximum 401k Contribution: 401k Overview
A 401(k) account is usually handled by the employer, with the usual “participant-directed” plan allowing employees the option of selecting from various options for investing. Employees can decide where their capital will be invested, typically between a selection of mutual funds that stress money market investments, bonds, stocks, bonds, or some combination of these options.
Employees may also have the option of purchasing the company’s stock as well as re-allocate funds between these investment options at any time. A 401k plan also offers automatic withdrawals from your paycheck, making it easier to invest for retirement.
If the plan permits, employees can make their maximum 401k contribution to their 401k on a post-tax or pre-tax basis. With either pre-tax or post-tax contributions, earnings from investments in a 401(k) account (in the form of interest, dividends, or capital gains) are tax deferred.
Maximum 401k Contribution
There is a maximum 401k contribution limit on the entire annual employee pre-tax or ROTH salary amount that can be deferred into the employee’s 401k account. These limits are periodically adjusted for inflation in increments of $500, and for 2011 the maximum 401k contribution is $16,500.
For an employee who is at least 50 years old or older at any time throughout the year it is currently permitted to make an added pre-tax “catch up” contribution of up to $5,500 as of 2011. Future “catch up” contributions could also be modified for inflation in $500 increments.
An employee may also choose to to fund their 401k account with pre-tax dollars or as a Roth 401(k) contribution if eligible. An investor may also choose a combination of the two options, but the total of these amounts may not surpass the limit placed on contributions in a one year period.
For more information on 401k plans and contribution limits consult with your plan administrator, or a trained financial expert at online broker ETrade.