Understanding How 401k Contribution Limits Work?

Understanding How 401k Contribution Limits Work?
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Putting money into a qualified retirement plan makes a lot of sense when it comes to creating a comfortable financial situation for your retirement years. One of the most popular retirement plans available in the market today is the 401k. Perhaps the biggest advantage of investing in this type of plan is the high 401k contribution limits that you have to work with.401k Contribution LimitsWhen you want to put money into a 401k, there are limits on how much money you can put in your account each year. Once you reach this amount, you can no longer deduct the amount of money that you contribute from your taxes. For example, as of 2013, the maximum amount that an individual can contribute to his account is $17,500. The only exception to this rule is if you are age 50 or older. At that point, you can contribute up to a maximum of $23,000 per year. This allows you to catch up on your contributions if you are behind.Total LimitsOne of the best things about contributing to a 401k is that it makes it possible for your employer to contribute matching funds to your account as well. This is basically free money that you can use to invest in your retirement. While you can get free money from your employer, there is a limit on this as well. The total amount of money that you can have contributed to your account is $51,000. To calculate this, you must add up the total of your contributions and your employer's contributions.Highly-Compensated EmployeesIf you are considered to be a highly compensated employee, then you may have additional limits placed on how much you can contribute to your 401k. This means that if you make above a certain threshold, then the plan may have limits on how much of your income you can put into the account. This helps encourage people in the company who do not earn as much to put money into the plan. Overall, it can get confusing to figure how much you could contribute in this situation, but the plan administrator should be able to make the calculations.
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