Understanding the 401k contribution limitations

PRLog (Press Release) - Feb. 15, 2011 - In the USA employees are offered to apply for alternative pension program called 401k plan. It is a saving account with deferred tax. An employee can get his bonuses and compensation payments in bank transfer to his 401k account instead of getting them in cask and paying proper taxes. Money from 401k accounts are taxed only when withdrawn. There are some 401k contribution limitations, implying that each employee can get pre-tax contributions in the size of $16,500 as maximum. This limit can be corrected on the following years due to the changes of inflation, it can be increased by $500. If an employee is 50 and above, he is allowed to have “catch up” contributions that due 401k contribution limitations cannot exceed $5,500. “Catch up” limit can also be corrected due to inflation.

A lot of companies stimulate their employees for applying for 401k program by transferring additional funds in the size of 10–100% from the contributions made by employees. All contributions made by employees and employers can be invested into several mutual funds that invest money into different shares and other capital issues. Employees control their 401k contribution funds and can move them at least once a year. If needed, it is allowed to move funds more often. In case of withdrawing money from 401k account at the age below 59.5 years old (not taking into account cases of death, disability, dismissal and other cases of emergency), 401k contribution limitations imply tax levy in size of 10% from the sum of withdrawn money. All the funds withdrawn after 59.5 years old are taxed in common way.

If it happens so that a person contributed more than maximum yearly 401k limit, the difference must be withdrawn by the 15th of April of the following year. Such violations occur when employee changes employer during the year and there can be problems with continuing 401k payments. If these violations are not corrected till April 15th, an employee must pay tax that is doubled.
The funds withdrawn from 401k account after the employee is 59.5 years old are taxed in common way in the year of money withdrawal. Well-paid employees have specific 401k contribution limitations for participation in 401k savings program.

Over the last years 401k pension program becomes more and more popular and usually it supplants traditional pension programs with guaranteed fixed payments for long service pension. Such payments are usually made by an employer. Employees are interested in 401k program as it allows reducing taxes and postponing payments for them till get retired. It is also advantageous for employers, as it is not so expensive than traditional pension programs. Moreover, according to these programs employees are fully responsible for the placement of funds. This program is also called CODA – cash or deferred arrangement. If to follow the rules of 401k and not to exceed contribution limitations, 401k pension program can be one of the most profitable pension programs for individuals.

Resource - http://new401kcontributionlimits.com/articles/understandi...

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