IRS Announces 401k Contribution Limits for 2012
On October 20, 2011, the IRS announced 401k contribution limits for 2012. This means that the 2012 pre-tax contribution limit for 401k plans will be $17,000 up from $16,500 with an index for inflation set at $500 increments. However, the maximum 401k contribution over 50 years of age is greater than $17,000.
As a result of the Restoring Earnings to Lift Individuals and Empower Families (RELIEF) Act of 2001, persons of age 50 or above are allowed to make “catch-up” contributions to their 401k plan. These contributions are designed to help people who got a late start or have been procrastinating on their retirement savings be prepared to retire.
The limit for over 50 catch-up contributions is $5,500. This also has an index for inflation set at $500 increments.
Combined, the general contribution limit and the catch-up contribution limit add up to a pre-tax maximum 401k contribution over 50 of $22,500 for 2012.
Why is the Maximum 401k Contribution over 50 Greater?
In 2010, the Employee Benefits Research Institute (EBRI) conducted a study, The 2010 Retirement Confidence Survey, that provides the amount of money workers have calculated that they need to have saved for retirement (using a retirement savings needs calculation vehicle) and the total savings reported among workers.
According to the EBRI study, the vast majority (70%) calculated that they need over $250,000 saved for retirement, and that’s without taking into consideration the additional 11% that either refused to answer or are unsure. When this is compared to the total savings reported among workers, the results speak for themselves.
Furthermore, only a third of people had saved $50,000; this is only a fifth of $250,000, the minimum amount that 70% of people need to save for retirement. 43% have saved less than $10,000 and $10,000 is significantly less than the minimum contribution for peoples under age 50.
Becasue of statistics like this, the catch-up contributions were a part of the RELIEF Act of 2001 to help workers be better prepared for retirement. As retirement draws closer, the contributions give workers a much needed way to “catch-up” on their retirement savings plans.
If you have fallen behind on your 401k plan and would like ideas on how to catch up or more information about the higher maximum 401k contribution over 50, please contact your 401k advisors.
(Article Source: 401k Employee Benefits)