401k Limits

In the interest of clearing up a bit of confusion regarding contribution limits to 401k plans, I would note that the IRS limits for 401k contributions for persons younger than 50 are as follows:

2004: $13,000 (per person)
2005: $14,000 (per person)
2006: $15,000 (per person)

Any matching contributions made by employers do NOT count toward these limits.

However, employers also impose limits regarding the percentage of an employee's salary that may be diverted into his/her 401k plan. The lower of the two limits (employer maximum percentage vs. IRS maximum dollar amount) is the one which overrides. For example, if Al Smith makes $50,000 per year, and his employer allows maximum 401k contributions of 10 percent of salary, then the most Al can contribute for 2004 is $5,000 (10% of his salary), plus any employer match.

Alternately, if John Jones makes $110,000 per year, and his employer allows maximum 401k contributions of 15 percent of salary, then the most John can contribute for 2004 is $13,000 (the IRS limit).