2010 IRS Maximum Allowed 401k Contribution Announced
Being that this is National Save for Retirement Week, it seems appropriate to share some bittersweet news that I just learned. The IRS has recently made the big announcement regarding 401K maximums for 2010.
The Maximum 401K contribution in 2010 will be…<drumroll>
Identical to 2009. <Cymbals crashing and silence>
That’s right, the IRS maximum allowed 401K contribution will stay the same as 2009’s 401K contribution maximum at $16,500. The 401K catch-up contribution for those over 50 years old will also stay the same at an additional $5,500 over the standard. For reference, 2009’s 401K maximum had increased $1,000 over 2008’s $15,500 maximum. Why is this bittersweet? Read on.
The Bitter Part of 401K Maximum Contributions Staying the Same
This news is a little bitter due to the fact that the maximum contribution level has increased in all but six years going back to it’s beginning in 1987 (almost 3/4 of the time). It’s also worth noting that in that time period the maximum 401K contribution amount has never declined.
The Bitter Part of 401K Maximum Contributions Staying the Same
At the same time, there had been rumblings that the maximum 401K contribution level might actually decrease in 2009 for the first time due to the Consumer Price Index (CPI) decreasing year over year. For all of us who maximize our 401K contributions each year, that would have been a big step back.
Let’s hope that 2011 brings only sweet news of another increase. The maximum 401K contribution limit has never stayed the same three years in a row, so we do have history on our side.
401k Discussion:
- Are you excited, disappointed, or indifferent to this 401K news?
- Do you plan on maxing out your 401K in 2010?
- Have you ever maxed out your 401K. How did it feel?
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401k’s are just getting hammered these days. Between limits by Congress, terrible stock performances and people pulling their money out to pay their mortgage, it’s a tough time for long term investing.
G.E. – disappointing for those that make enough to save the max. I think most of us in our 20’s don’t have to worry about coming close to that! Plus, it might be a good idea to think about contributing $5k of that to a Roth IRA. Earnings and distributions are all tax free and given where our gov’t is heading it might not be a bad idea.
I think this is absolutely ridiculous. The limit should be raised to AT LEAST $30,000 if not $50,000. How does someone retire off $16.5k/yr after 30 years? Ain’t gonna happen.
@ Financial Samurai – can’t disagree. I don’t see the points to limiting retirement savings. I guess once you hit your 401K max there is always IRA’s. If you are self-employed, the SEP IRA limits are much higher.
@G.E. – I agree that it’s disappointing for those who max out their 401(k)s each year. Can you explain why a cap even exists? I suppose the government would like to collect their share of taxes at some point…
@Brandon – I completely agree that the majority of 20 somethings aren’t in a position to max out their 401’s, including yours truly. I’ll be there someday. But currently, after contributing 4% to get the company match, I still don’t have enough to max out the 5k limit in my Roth IRA.
@Financial Samurai – It would be great if the cap was higher for those fortunate enough to take advantage. Again, I hope to be one of the lucky ones soon. But your blanket reference that nobody can retire after contributing 16.5k/year for 30 years, is wrong and probably demoralizing for those who may not know any better. Since I’m not contributing the max to my 401k, should I assume that I’ll never be able to retire? Assuming an 8% return less 4% for assumed inflation – 16.5k per year for 30 years = just under $1,000,000.00. Like you and G.E., I hope to have accumulated a much larger portfolio at that point in my life, but many people won’t. And they’ll still be able to retire.
Per your questions G.E. – I’m currently indifferent. If I had maxed out my 401 last year, I’d be disappointed that the cap was not increased. All of my consumer debt and student loans will be gone in 2010, and I’ll only be left with the mortgage. I’ll take a closer look at my retirement contributions in 2011.
Great post!
Hey Broke MBA – Yes, you are correct. If you contribute even less than 16.5K/yr for the next 30 years, you will NOT have enough to retire. It’s a sad truth, but it’s better to face the truth than not know reality.
Have a read of the latest Time’s article.
A 401K alone will not be enough for retirement.
GE, I sent you a shout out today on my site. Hope you got it.
@Brandon – sorry about your poor choice of career and/or congratulations on being independant.
When I was in my 20’s, I could have maxed out my 401k but I made some dumb descisions like buying a new car and renting an expensive apartment. But now a days so many 25 year olds are living at home mooching of their parents there is no reason they shouldn’t contribute max to their 401k if they can get a job that pays ~50k/yr.
These limits don’t seem like a big deal until you hit them. When you get an MBA, a couple promotions, and then realize you can only contribute 10-12% max – it’s a major deal. Plus, as you get up to $166K combined w/ your spouse (not hard with a couple of professional jobs), you can’t contribute to a Roth IRA.
Do the math, you generally need 20 times your FINAL income in retirement savings (using 4% withdrawal rate that most financial planners use). This means that you need to save 15% of your income from age 24 to 65 (math geek alert – 3% income growth, 8% investment retire used for calculation). If you want to retire earlier (as I do), you need to save more than 15%.
I’m now 40 and saving like I should have in my 20’s (max out roth ira first and then max out 401K). Because of compounding, investments in your 20’s are worth 4-5X what later investments are. Sacrifice and save then max – you’ll thank yourself later.
I figured it would be the same for 2010. Hopefully the IRA contribution limits go up over the next few years.
The 401k limitations are good to know yet most people don’t save enough thus don’t reach the limit.
I will be very pleased if one person will increase her/his savings to a 401k plan after reading my comments about FREE money:
One key to building wealth is “Don’t turn down free money!” When you maximize contributions to your qualified retirement plans you accept free money from taxes you normally owe the government, from the interest earned on the government’s tax dollars which are now inside your retirement plan and from the interest earned on the interest.
If you contribute $1,800 annually to your retirement plan you benefit from $350 in tax savings each year. Continue to contribute annually and these $350 grow to $5,430 in 10 years and $16,830 in 20 years.
Go for it!!! Begin saving inside your 401k today. If you are doing it already – increase your contribution at least to your employer matching level. This is another source of FREE money you don’t want to let go.
http://www.peoplesfinancialadvisor.com/personalfinance/?p=20&post=26597
Thanks for listening,
Bob Schumann, CFP
I’m 27. I do not qualify for a Roth IRA (make too much). I’m a little upset about the max not going up for 2010. I’ve been maxing my 401K since 3 years ago.
Julie,
Incorporate yourself, start some sort of side business, get your deducttions and roth through that…
And …
will you marry me?
I think the maximum should go upto 30000$ atleast. We should all begin saving our money from now on inside 401k.
@ Broke MBA The 401k limits are in place only to be considered a ‘qualified’ retirement plan. In order for the company to maintain and keep the plan open for its employees, it has a lot of tests it has to go through – a big component of this is the discrimination test. Clearly not all customers pay each employee the same amount, but the plan has to have participation from all classes of employees without ‘discriminating’ against those who don’t make as much. The limits apply to everyone who’s a participant in the qualified 401k. One of the reasons why being a qualified plan is so important is because then the plan is covered by ERISA.
Two things to keep in mind though, once your income hits the compensation limit for the year (it’s $245,000 for ‘09, not sure what 2010 is), even if you haven’t had a chance to contribute the full $16.5 , you automatically cannot contribute anymore. A lot of people aren’t aware of this and it could affect you big time if you were planning on maxing out.
HOWEVER, what a lot of people don’t know, is that many companies offer non-qualified 401k plans. Each plan is different, but once you reach the Compensation limit of $245, then you can start contributing to the non-qual plan AND if you’re employer is nice, they may match it too.
-Only downside of this, is that the non-qual plan is not covered by the ERISA guidelines, so that if the company goes under, those amounts may not be protected.
Sorry it’s such a long answer, but each ‘tidbit’ plays into the next one to try and explain it.
One of the best things anyone can do is call their company to have someone explain their 401k to them. There’s also a ton of information available out there on these accounts. I personally don’t like that there’s a limit and hope that someday I’ll make enough to be able to max out. On a side note, I’m only 23 years old and think that saving should start as soon as possible – I’m worried that SS may run out before I even turn 40. I’m trying to plan my future as best I can, but live on my own in an apt in Boston, work full time, go to grad school at night and have still managed to put away about a year’s salary in my 401k. It’s not easy, but the way I see it, if I can take the time to learn about it, and save as much as I do, then anyone can really. Sorry all I didn’t mean to go off on a tangent, but it’s something I’m pretty passionate about. Hope the first part helps! haha
“How does someone retire off $16.5k/yr after 30 years? Ain’t gonna happen.”
This and some of the other earlier comments seem to imply that the only way to save for retirement is with a 401(k).
There are other options:
- Roth IRA (if you qualify), which I think is the first thing that should be funded, even before the 401(k)
- Traditional IRA (if you don’t qualify for a Roth)
- Some companies still have some sort of pension plan or contribute some amount to a 401(k) for you which is in addition to your own contributions
- and of course there’s always the way our parents/grandparents saved for retirement before all these tax-advantaged options came along: put aside part of every paycheck and don’t touch it until you need it during retirement. There’s no tax advantages to this, but when you’re 80 and go to the pharmacy to get your medication, they’ll take the money and give you the pills regardless of whether or not you got a tax break when you saved that money.
Social Security might also provide retirement income, though I personally am not counting on that given the condition that it’s in and the perpetual lack of anyone in Washington with the courage to fix it.
“The maximum 401K contribution limit has never stayed the same three years in a row, so we do have history on our side.”
I wouldn’t count on history helping us. Since 401(k)s started, the economy has never been as bad as it is now. The years of gluttony and financial irresponsibility on the part of the government, many companies, and many citizens have finally caught up with us and it’s time to pay the piper. Unfortunately, the people that were responsible also have to suffer (though in most cases not as much as the others, which is as it should be). I think it’s going to take years to get out of the hole we dug, so I think the odds of a third straight year with no increase – or possibly even a decrease – are much higher than they’ve ever been.
I have maxed out my retirement plan and husband has too for the past 5 years. It feels great! I do wish they would increase limits.
We are nearing retirement age, and are much farther from the million dollar goal than I projected two years ago.
I do not expect increases in the contribution limits in the future. The government wants you to spend, not save, to help the economy “recover”. They also need more tax revenue, so I expect they will change the rules more frequently as the deficit grows, and find ways to increase tax revenues wherever they can.
Sara I beleive your comment about the contributions stopping once you make 245K is incorrect. My employer only allows me to contribute 6% of my income and I have maxed my 401K this year. That means 275K at 6% would be 16500. If it were 245K I would have been capped at 14700.
I can’t believe that this site is simultaneously advocating saving for retirement and inflation (inflation is the only reason that the 401K contribution cap increases). Sure, if the contribution cap increases, but the inflation that drives up the contribution cap also REDUCES the value of ALL previous hard-earned contributions and gains. Anyone saving for retirement is far better off with stable currency. Sure, a higher cap would be nice, but to do so without inflation will require a more fundamental change to the current law.
@jh – not advocating inflation in any way. I realize that the caps are tied to inflation – but that does not mean that I am ‘pro-inflation’. I’m pro retirement savings. Although a little inflation in this economy would not hurt at the moment.
I am not in favor of inflation either but it makes sense that the IRS ties all of the retirement plan limits (401K, 403b,etc) to that.
Even you it limits you, as your salary, bonuses, and other stuff increases, you automatically are able to put in more. See http://www.401kmaximum.org for more info.
thnks
I just found this site and the information is excellent. My roomate tried to talk me into a Roth IRA in college but I was too busy drinking beer and watching Jerry Springer to listen. I regret it now but I have done my best to catch up. I am glad to hear that the ROTH income caps will be removed in 2010 but wish the $4,000 limit would increase. I own a business and max out my SEP IRA but my income has been to high to fund a Roth for the past few years. My wife’s company now offers a Roth 401K which seems like a great idea especially with the $16,500 cap vs the $4K in the regular Roth. Now we need to decide wether a regular 401K, roth 401K or a combination of the two will work best for us. Any ideas?
@ Aggie – that all depends on whether or not you could use the tax breaks now to help you achieve short and mid range financial goals (traditional) vs. waiting for the tax breaks in retirement (Roth). Some argue that tax rates will go up over time and advocate the Roth for that reason.
I could use the tax breaks now but I think that it would be better to fully fund the Roth 401K because in the long run I think I would be better off with all the untaxed interest gained. Also, my wife plans on quitting her job once we have kids and I won’t have the option of the Roth 401K anymore. Just the $5K per year Regular Roth ira.
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