| 401(k) Tip |
- The government sets an annual dollar cap on contributions.
- Your employer may limit your contribution to a percentage of your salary.
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As you decide how much of your pretax income you’ll contribute to your 401(k), you have to stay within two sets of limits: those set by the federal government and those set by your employer.
- The government caps your annual contributions at a dollar amount—$16,500 in 2009. If you’re 50 or older you can make an additional $5,500 contribution in 2009, for a total of $22,000. The annual contribution is increased periodically to reflect increases in inflation.
- Your employer may limit your contributions to a percentage of your salary. Typically, that cap is 10 percent or 15 percent of your gross income, though it may be more or less. You can't contribute more than the percentage of your pay that your employer lets you add to a 401(k) each year, even if that means you can put away less than the government's cap.
- On the other side of the scale, your employer may require a minimum contribution of 1 percent or 2 percent from any employee who wants to participate in the plan.
| A Bit Here, A Bit There You usually contribute a percentage of your compensation, or pay, to your 401(k). Depending on your job, your compensation may include wages, salary, overtime, commissions, and fees for professional services. |
- Individual, or solo, 401(k)s allow you to defer salary up to the same contribution limits as other 401(k)s. In addition, your business, as your employer, can contribute up to 25 percent of your earnings. The combined cap is $49,000 in 2009, plus the catch-up contribution of $5,500 if you’re 50 or older.
- In contrast, if you’ve established a SEP-IRA—another retirement plan that’s available to sole owners and other small businesses—you can’t defer salary or make a catch-up contribution, though your company can contribute up to 25 percent of your earnings to a cap of $49,000.
If you're self-employed but haven’t incorporated your business, you're still eligible to set up a solo 401(k), defer salary, and make an additional contribution. The only difference is that you’re limited to adding 20 percent of your compensation in addition to your salary deferral. The cap is $49,000 in 2009, plus an annual catch-up contribution of $5,500 if you’re 50 or older.
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