Do You Know Your Limits? Facts You MUST Know About 401k Contribution Limits
It’s that time of year again: as we come to the close of 2012, the focus is all about how to cut taxes. Did you know that one of the best ways to reduce your taxable income is to put a little more in your 401(k)?
Of course, to steer clear of any trouble with the IRS, you need to know all about contribution limits. So how to make the most of your 2012 income and 401k while staying in Uncle Sam’s good graces?
Know Your 401k Limit
There are two different 401k limits for the year 2012.
If you are not yet 50 by the end of this year, you can contribute $17,000 of any and all wages earned to your 401k.
If you are 50 or older by the end of this year, you can contribute $17,000 plus a “catch up” contribution of up to $5,500 for a total contribution of $22,500.
Remember that these limits apply to how much employees can contribute to their 401k’s; there’s a higher limit that extends to include profit-sharing and employer matching schemes. As much as $50,000 can be added to 401k accounts if you take into account what your employer can pitch in or you can add through profit-sharing. Don’t forget you can add a $5,500 catch up contribution if you’re 50 or older, too.
If you’re self-employed, you can set up a solo 401k plan, which gives you access to the higher limits detailed above. If you are a sole proprietor, LLC or partnership, or you act as a consultant or freelancer, you may be eligible to set up a solo 401k.
Just a note to those of you who make over $115,000 or own 5% or more of a business: you are considered “highly compensated” by the IRS. If you are part of a business with multiple employees, you could be subject to a test. The test essentially determines if employees who are not considered to be highly compensated have enough in their 401ks as part of an employer contribution. If it is determined that they do not, highly compensated workers will be held to lower contribution limits.
Unsure of how to proceed? You’re not alone! So many people have questions about how they can make the most of their retirement savings without giving up too much to the government. At iPlan Group we’re excited- yes, excited- to sit down and brainstorm with you. We’re committed to giving you financial freedom in retirement. Visit our website at www.iplangroup.com or call us at 1-855-60-iPLAN (1-855-604-7526) to learn more about how we can help.