401(k) Contribution Limits Raised for 2009

Source: IRS.gov
Date: Oct. 16, 2008

Contributing to a retirement plan is one of the best tax shelters available to people during their working years. Recently, the IRS announced that most of the retirement savings limits will increase for 2009.

"Most working professionals have access to a 401(k) plan or a 403(b) plan at work. The amount you contribute to these plans generally reduces your taxable earnings and always grows tax deferred. For 2009, you can contribute up to $16,500 into a 401(k) or 403(b) plan through salary deferrals," explains David G. Strege, CFP®.

In 2009, you can contribute $16,500 to your 401(k). That is $1,000 higher than in 2008. If you are age 50 or higher, you will be able to contribute an additional $5,500 for a total of $22,000. The catch up provision is $5,000 in 2008. These increased limits also apply to 403(b) plans and 457 plans. See this IRS release for more information.

Looking to set a monthly budget for 2009? To max out the allowable 401(k) or 403(b) salary deferrals next year, people should instruct their employer to withhold $1,375.00 a month from their pay as of January 1st.

If you’ll be eligible to take advantage of the catch-up provision, your total annual contribution of $22,000 translates to $1,833.33 a month.

Unfortunately, there are no increases in the amounts you are able to contribute to traditional and Roth IRAs. Those limits remain at $5,000 or $6,000 if you are age 50 or older.

While these increased limits are good news, there is also some bad "tax news" to throw into the mix. That bad news comes in the form of a higher Social Security wage base in 2009. In 2009, wages up to $106,800 will be subject to 6.2 percent in FICA taxes and 1.45 percent in Medicare taxes. In 2008, the limit was $102,000 so this increased limit causes an extra $298 tax bill for employees.