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The Internal Revenue Service limits how much income you can set aside each year in your 401(k) plan or plans. Whether you're behind on your contributions or just wanting to put aside a little more each year, if you're 55 or older, your 401(k) plan contribution limits increase. Knowing how the limits increase and how your plan may differ can help you maximize your annual contributions.
Limitation on Elective Deferrals
The maximum amount you can defer into your 401(k) plan adjusts each year for inflation. As of 2012, the standard limit is $17,000. However, for people age 50 and older, the contribution limit increases by $5,500 because of what is known as a "catch-up" contribution. This extra $5,500 increases the total limit for someone older than 50 to $22,500. The catch-up contribution does not count toward the general 401(k) plan contribution limits.
Limited by Income
You can't defer more to your 401(k) plan than you earn in compensation from the employer for the year, even if the annual contribution limit exceeds your compensation. For example, if you earn $10,000 from the company that sponsors your 401(k) plan, even if you want to contribute the elective deferral limit, you can't. However, if you work for multiple companies that offer a 401(k) plan, you can contribute compensation from each job to that company's 401(k) plan as long as the total does not exceed the annual limit. For example, if you earn $10,000 from one company and $12,500 from another, you could defer the entire $22,500 into the two companies' 401(k) plans.
The IRS also caps the total annual additions to your 401(k) plan and adjusts this amount each year for inflation. As of 2012, the limit is $50,000, but the $5,500 catch-up contribution is not included. So if you're 50 or older, your total annual additions can't exceed $55,500. Depending on how much your employer contributes, your elective deferrals may be reduced. For example, in 2012, the most you can defer into your 401(k) plan if you're 50 or older is $22,500. However, if your employer contributes $50,000 to your 401(k) plan, you can contribute only an extra $5,500 because of the total additions limit.
Employer Plans May Differ
The IRS contribution limits are ceilings for the amount that you can contribute each year, meaning employers may set lower limits. In addition, employers do not have to allow for catch-up contributions. However, if you work for multiple employers, you may be able to get around this restriction by contributing money to both companies' plans. For example, in 2012 the elective deferral limit, not including catch-up contributions, is $17,000 and $22,500 including catch-up contributions. If you work for two companies that do not permit catch-up contributions, you could contribute $11,250 to each company's plan. In doing so, you stay under each plan's limits and under the IRS' annual limits.
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