Tuesday, September 15, 2009

Lower 401(k) Contribution Limits Likely in 2010

Earlier today I came across this new article from Boston.com discussing the likelihood that 401(k) contribution limits might get lowered next year. As the author explains, the main reason for the reduction in contribution limits is because of the U.S. dollar’s poor inflation rate in 2009.

Unless inflation really kicks up in the last few months of 2009, it appears that the amount that working individuals can contribute to their 401(k) will actually go down in 2010. In 2009, individuals under age 50 could contribute as much as $16,500 to their 401(k). Individuals age 50 and older were able to contribute $22,000. In 2010, it looks like individuals under age 50 will only be able to contribute $16,000 to their 401(k). Those age 50 and older will still be able to contribute an additional $5,500 to their 401(k) but the total amount they can contribute will now be $21,500. In addition, the amount one can contribute to a defined contribution plan will also fall -- to $48,000 in 2010.

All of this is happening because inflation is flat. When inflation is not increasing, a lot of things are impacted. Social Security is a big one. After a record increase in benefits last year, there will be no increase in benefits in 2010. Most people are still not aware of this but they really need to be planning accordingly. On the "plus" side, the Social Security wage base is expected to remain unchanged next year. Earnings in excess of $106,800 will not be subject to the 6.20% Social Security tax.

The best course of action? Contribute the maximum amount permitted this year!

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