New 2011 IRS Rules, 2011 IRS 401k contribution limits

Jan. 10, 2011 - PRLog -- Both 401k contribution limits and withdrawal rules change this year. While the financial sector still defines and administers the retirement plans, it is IRS (Internal Revenue Service) that regulates them. The 401k plan becomes the most popular one for saving for retirement, which works as following: employees decide about the percentage of their salary they want to place to their account, after which that amount is deposited into their personal 401k accounts within the payroll cycle each pay period. Besides, the employees also decide about the investment choices within the plan themselves as well.

There are some rules that apply to all retirement plans – for example, withdrawal rules, eligibility of participant, and contribution limits. Meanwhile, as opposed to IRA, the 401k plan is considered as most valuable and flexible retirement plan. Those employers who want to offer their employees the option of taking part in a 401k plan have to comply with the IRS rules. First of all, minimum age of 21 must have been attained, along with 1 full year of service prior to enrollment completed. The employee shouldn’t be eligible for a union retirement, while older ones can’t be exempted from participation. A traditional plan implies that the employer is free to contribute a non-elective percentage, either it be a certain amount or percentage without input. It can also match a portion of their contribution in order to encourage employees to participate.

On the other hand, a safe harbor plan means that the employee’s contributions are required every year. Sometimes the employers opt to an automatic enrollment plan for each employee. Then the annual non-elective or matching contributions are made every year to each account.

As for the contributions to a 401k account, they are made before withholding income tax from the employee’s paycheck. In fact, it is tax deferment on retirement savings that is considered to be a very powerful incentive for employees to participate. Since income tax is withheld at the moment when funds are withdrawn during retirement, the income tax bracket becomes lower. Therefore, in order to prevent tax avoidance schemes, the IRS has established certain limits on the contributions that are made to a 401k accounts.

The combined employee/employer contribution limit was $16,500 for the 2010 tax year both in traditional and safe harbor accounts. However, for this tax year, the limits haven’t been published yet, so we can only note that they’ve held steady for both 2009 and 2010. Meanwhile, employees over 50 were allowed additional catch-up contributions of $5,500 in 2010.

Originally, a 401k account is destined for saving money and investing wisely in order to increase the fund value to make them available for living expenses after working years. The loans are available for limited periods before the age of 59 and half years, while penalties are imposed for both early distributions and withdrawals. If employment changes, the funds under 401k plan can be taken for rollover to a traditional IRA account. Then, after another employer is found, it starts a new 401k plan.

The IRS code considers specific events as hardships and covers them by special rules – for example, educational, funeral and medical expenses, and damage to primary residence. When employment ends or at the age of 70 and half years, the retiree must start drawing funds and paying tax on his withdrawals.

Today lots of people can’t understand how they are able to afford to contribute to a retirement fund if they don’t earn much. However, spending the 1st year before eligibility cutting expenses and putting the first 3% aside in a savings account can prove that it’s possible over the long term. They would see then that matching funds add up rapidly, encouraging further participation.

It is recommended that you contact your financial adviser to assist you in evaluating the participating funds within 401k plan you invest your distribution in. You shouldn’t guess at where to invest your savings in order to optimize your returns, because market’s ups and downs may make you worry more about long-term investments. It’s better to monitor the performance of your 401k account twice a year instead of scrutinizing it each quarter.

Resource - http://new401kcontributionlimits.com/articles/new-2011-ir...
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