New rule may mandate lower 401(k) contribution limits in 2010

Joe from Tampa…if you are contributing 50% of your salary that means that you're making no more than 32K per year (assuming no company match). That puts you in the 15% tax bracket. If you retire and stop working (assuming the tax rates stay THE SAME) you will be in the 10% tax bracket. That means you are saving 5% by contributing to your 401k (which is in fact a tax shelter). Unless you are debt-free, you would be better suited by taking that money and paying off your mortgate, car loans, credit cards, etc, which are probably costing you more than 5% interest. Unfortunately, by the time you retire tax rates will be much higher and you will be paying more on your 401k withdrawels than you would have if you had just taken the money in your paycheck.

Oh and one more thing…50% I guarantee you is not the average

This topic is minor in comparison to what is to come in the future. Our heavy-indebted government will be looking for sources of money. There was a large pool of it before the recession but still large enough now for the government to have an interest to take over our tax-deferred retirement plans. It may happen sooner that you realize so be prepared to take action.

"If there is no social security funds available by the time I’m qualified to receive them, I will sue the US government for fraud & theft."

Good luck with that one. It's only called an entightlement program., it doesn't mean you are entightled to get paid. It's broke. So plan accordingly.

> Social Security payouts are where low-inflation is going to do real damage.

Where's the damage? If the inflation is low, you need less to pay less money. Additionally, Americans in the working age get paid less and less, why should non-working seniors get it better?

The poster from Staten Island wrote, The 401k is the worst vehicle to contribute to. … The assumption was that you would be defering taxes at a high bracket and tacking out distributions in a low bracket which pays off. …

Not necessarily. A lot of companies, especially mid to large caps offer 401(k) Roth offerings, which allow you to pay your taxes now and take any gains tax-free in retirement. My last employer offered a Roth 401(k) plan.

Also a Roth 401(k) plan effectively allows you to contribute even more today than a regular 401(k) plan because the cap on the two are the same, yet you get to pay the taxes on the Roth 401(k) money today. If you are in a 25% marginal tax bracket for instance, you would effectively be contributing $22,000 in pre-tax money if you are maxed-out.

Of course the 401(k) is inferior to the IRA. IRAs tend to offer more options at a lower cost. It's a shame you can't just contribute to a Roth instead of the 401(k). That's bureaucracy for you I guess.

As for other posters and their complaints about contribution limits – I’m one of those 7%. I’m a computer programmer. I believe I make about the median income for my experience in my field in my area. I have not always been able to contribute the max. When I was married with a spendthrift spouse and children, contributing anything at all was a struggle. These days I’m divorced, the kids are grown and I live with a woman that is fairly well off and splits living expenses with me.

Today I wish I could contribute half my paycheck, but the law simply doesn’t allow it. At my age, it’s almost shameful how little I have saved for retirement (a good deal less than 2 times my gross income). You all may think the 401(k) contribution limit is a lot, but I can’t wait until I’m eligible for catch-up contributions. One of these days I’d like to retire, but I’m going to need a lot more than 2 times my gross to do it.

BTW, Some 401(k) plans limit employee contributions to a percentage of pay. For instance, I’ve seen employers cap contributions to a max of 25%. Under those plans, you would need to make a gross income of $66,000 just to hit the annual limit, which is a fair amount higher than the median income here. Also, I wonder if employer matching funds are counted. I don’t believe they are included in the $16,500 limit.

401k is a perfect vehicle to save retirement funds for people who ordinarily would not invest in retirement savings if a 401K did not exist. Our friend from Staten Island seems a little confused of why a 401k was created. A 401K is the only avenue most average Joes have to save for retirement, average Joes are afraid of the stock market and unsure how to save money other than a 401K. Its more than deferring taxes dummy, it creates a discipline to save money over time in order to be able to fund a retirement account.

My understanding of savings is that it is the amount saved out of take home pay. If you decrease 401k contributions by $500, increasing take home pay, and some people save the $500 then savings have increased by $500.
401k's are a big reason for our apparent anemic savings rate because people have moved money they would have saved out of their take home pay into 401k's over the years.

The 401k is the worst vehicle to contribute to. It was organized in the late 70's early 80's when taxes were really high. The assumption was that you would be defering taxes at a high bracket and tacking out distributions in a low bracket which pays off. Now, were in historic low tax brackets and with the gov't spending money like its nothing, baby boomers retiring every second, heathcare issues etc, where do you think the money is going to come from to pay for all this? By raising taxes. So your deferring taxes at a lower bracket and can be paying them at 40, 50 or even 60% brackets. You would pay more in taxes in the first 3 years of distributions than you would the entire time you were "getting tax breaks" no matter how much you contribute. Times have changed and people need to stop listening to the Ormans, Ramseys of the world because they give the absolute worst advice period.

JD – It is your arrogant attitude that put us in the position we are in today. Success is not a gift…it is something you earn from working hard and having aspirations for a better life for you and your family. The "vocal, rich minority" as you call them is what is keeping your taxes reasonable. Tak away the rich and everyone else will be paying quite a bit more in taxes.

It's always easier to blame someone else. Look in the mirror and take accountability for your life. Don't blame someone for working hard and having a good paying job. They pay 80% of the taxes in this country.

If you're going to blog, try not to sound as ignorant as you are.

I wonder what percent of 401k contributors hit the mandatory "highly compensated personnel" cap? While there are some ways around it, it's an effective lower cap for 401k contributions seemingly driven by overall participation, or lack thereof, in your company's 401k plan.

"When you make $100k a year I don’t think having to pay taxes on an extra $1000 or so is really that big a deal.
Sometimes I think this country’s vocal, rich minority needs to suck it up and take some responsibility for all the success they’ve achieved here."
ARE YOU KIDDING ME?
The "rich minority" are already sucking it up and as you no doubt well know are already paying upwards of 50% income taxes in some states.
I would also add 'those rich people' say the top 20% pay 80% of the taxes since the bottom 50% PAY NONE.
How much is enough for you people?

If only 7% come within $500 of the max, why not raise the max to $20,000, $50,000, or higher? Allow those who want to defer taxes to do so. Does not sound like we would lose much tax dollars. We have too many "retirement" types anyway with multiple, overlapping limits and rules.

Like Rex, I max out my 401k and Roth IRA (have done for last few years.) I'm not a doctor, lawyer, techie or anything like that. I just save much as I can.

Last trip to the movie theater? Over a year ago. Last time I got a soda from a vending machine at work? Can't even recall.

I know the Babyboomers will suck dry Social Security and Medicare in the next 20 years so I'm preparing for my retirement the best I can.

"No Jennifer, maxing out your Roth IRA would be 10%. Get a calculator."

Actually I think Jennifer was saying if you maxed both your Roth and 401k. not just Roth.

Tyler: I think Jennifer meant that if you were maxing out BOTH your 401(k) and your Roth (16,500+5,000) you would be saving 43% of a 50K salary.

Wow Rex, your comment sounds like it came from me. I too max out my 401k and IRA. I aslo do not expect to get any of my SSI contributions back when I retire. My goal is to save $2 million dollars to be financially independent.

"rich minority needs to suck it up and take some responsibility for all the success they’ve achieved here."

Please understand I am far from rich. But since when have the rich not taken responsibility? They already pay a higher tax rate then us low or middle income people.

There is nothing about "taking responsibility for their success" that makes sense. They worked hard for their success, so they should reap the benefits of their hard work.

JD,
You need to go look and see how much the rich already pay on a percantage basis.
How do you think some of these people became "rich"? It was by having the work ethic and drive to get there.

The 401k is not a tax haven for the rich. It is a savings program toward retirement. A retirement that does not include a pension and unless a miracle happens, social security. The miracle will probably end up by making the "rich" pay more and get less. As for companies contribution limits you need to do your homework because they all are different. Mine allows 50% of my pay and I max mine every year. I did it on many years that I probably made less then you. I am not rich but I want to retire someday. I give up on certain things now to have a work free retirement someday, something you will never accomplish unless you do max it. The 401K limits should be rising not lowering due to the fact that social security is all but a dream that nobody in goverment dare even talk about because they know the system is guaranteed to fail.

Tyler, Jennifer was right, you're just misunderstanding the way she put it. She was saying if you max 401(k) and Roth it would be 43% of your income. $16,500 + $5,000 = $21,500. Don't be snarky when you're the one who didn't understand.

The fact that 93% of Americans should be saving more is an entirely different topic.

Not that I disagree with this statement but the formula she is basing it on is misleading. The typical 401k plan only allows a 16% contribution which means you would have to make 100k a year AND contribute the max to reach the federal max of 16k. Bottom line is the only people who care about this is those who need the tax shelter – the rich. Its basically a tax increase for them.

Since most of us need dual incomes to afford to breath, is it reasonable to expect medium income folk to max out both partners' IRAs and 401k's? I don't think it can be done without taking out a big mortgage. That would be $43k per Rex's figure. There seems to be an inverse relationship between peoples' need to save and their ability to save.

I thought we were supposed to be spending more money to help the economy. How can I spend more if I am also supposed to save more, and not take out more debt I cannot afford?

The more politicians try to micromanage the economy and abandon free market principles, the more they contradict themselves. Inefficiently. Invariably at tax payers expense.

Oh puhleeze. Who can afford to contribute the "max" anyways? The max 401k contribution would be 47% of the median salary in my city. So big deal they are dropping the limit a little. If you are making enough money that contributing $16k a year to your retirement is pretty easy for you, you can suck it up and open an IRA, or put the money into tax-free municipal bonds, or any other method of saving money. When you make $100k a year I don't think having to pay taxes on an extra $1000 or so is really that big a deal. The people who are really struggling in this country don't have 401ks, and can't afford to contribute even enough to get a match if they do. Sometimes I think this country's vocal, rich minority needs to suck it up and take some responsibility for all the success they've achieved here.

No Jennifer, maxing out your Roth IRA would be 10%. Get a calculator.

Forget about saving for retirement. With unemployment as high as it is most Americans are too deep in debt to worry about savings right now.

Great job, Rex!

If the US economy were full of Rex's and near-Rex's, we would not have such a Wreck on our hands.

The level of artificial economic "goosing" along with social engineering is the essential root cause of the economic downturn.

Politicians from both sides of the aisle are to blame.

"The fact that 93% of Americans should be saving more is an entirely different topic"

If you're making $50K, and maxing out your Roth IRA, you'd be contributing 43% to your retirement accounts. The fact that 93% of people don't max out their 401(k) doesn't mean they're not saving enough. 43% is a bit much.

I was under the impression that, by law, the increase in the Medicare Part B premium could not exceed the COLA increase in one's Social Security payment. If that is so, most seniors on Social Security will see no increase in their Medicare Part B premium.

If there is no social security funds available by the time I'm qualified to receive them, I will sue the US government for fraud & theft. I would imagine quite a few people will demand to be made whole after being forced to pay into s.s. their entire working years. I envision quit a rebellion if s.s. is cancelled without paying back the people.

You gotta love those politicians. We tax payers pay for their dazzling health care plans, but we can't afford one for us. Now we get to pay more taxes, by reducing our 401k contributions, to support their pensions and perks, but we can't afford to do that for ourselves.

I am not sure, but I think this is going to affect my MGI Bill payments from the VA. As they are also auto-adjusted based on CPI. Sadly my school costs aren't likely to trend in the same direction. Damn this recession!

Well said, Rex!

Ben

Who cares if they lower the level. With the financial mess that we are headed for your tax deductibility of your 401K plan is going to be eliminated. They are already having hearings on this as part of our future tax policy. It is an easy way to subversively raise taxes without making it feel like they did. At that point in time you will be better off depositing all your money in a Roth 401K if your employer offers it or putting the maximum into a Roth IRA if you can. Believe me, it is coming.

I'm still trying to figure out how this is possible, since max contrib. limit COLAS are set by IRC 401(g) and 415(d), which define formula by INCREASES in CPI.

None of the complaints here appear to have come from anyone who has read the article.
Contributions are indexed to the value of money, you may have heard of inflation. It has nothing to do with the goldurn-gubmint trying to take more of your money.
What you should be concerned about is why there are multiple methods being used to calculate the contribution limits of different plans.

This is absurd, whoever thought of lowering 401(k) contributions should be fired. I can see it from the IRS’s very skewed end that they want people to be spending money to help the economy out of this recession, but that will come eventually. We need to be saving just in case this mess happens again and sooner than we plan. Inform your Congressman immediately!

I agree that that lowering the contribution amount will not impact most tax payers. I still hate the idea of the goverment influencing everything. Someone (tax payers) have to pay for the bail outs, cash clunkers, homebuyer credit and these two wars we have been fighting in…ugh!

One could certainly make the argument that none of the 7% that max out their 401(k)'s will be angry about this. We are only talking about a few hundred dollars, and these people are already on solid financial footing.

This wouldn't be problem if CPI was a true, or even reasonable measure of cost of living. My expenses sure didn't go down this year.

I am happy to be part of the 7% of 401k participants who max out their contributions. I also Max out my Roth IRA each year. (Total annual savings of $21,500).

I take full responsibility for my future. I do not expect any Social Security payments (but will gladly accept them if they still exist).

Once I have 2 million saved, I can do whatever I please with the rest of my life.

If I'm not moving toward financial independence, then something is terribly wrong. I don't see a point to working my entire life just so I can maintain what I've got with no possibility of financial freedom.

If you want to be free, you must fund your own future.

It's time to take the good with the bad with indexing. People that are saving at the max, myself included, will just have to find other ways to save; like pay down debts, buy municipals, buy treasuries. People on social security know prices for food an gas and electricity have come down so they can absorb a slightly lower income. The higher medicare premiums are a concern for them but it's a different issue.

Those of us over 50 need an INCREASED ability to save in tax-deferred (401k, 403b, etc.) as well as Roth accounts – not a reduced ability. If Congress wants more taxes now, then raise the limits for Roth accounts (since we pay taxes now on the money we put in them).