401(k) Contribution Limits for 2012
Thanks to inflation, the maximum amount of money you may contribute to your 401(k) in 2012 will change. This applies to 403(b) accounts, as well. For 2009, 2010, and 2011, the maximum you may designate to your 401(k), not including your employer’s matching contributions, was $16,500, but in 2012, this will finally increase to $17,000. If you are age 50 or older, you can contribute an additional $5,500, which remains the same from 2011, beyond this maximum for a total of $22,500.
The total contribution limit, including employer contributions, has increased from $49,000 to $50,000.
For anyone who contributes to a traditional IRA, this is normally tax deductible, but this benefit phases out. In 2011, the phase-out occurred for single taxpayers whose modified adjusted gross income fell between $56,000 and $66,000, but in 2012, this phase-out begins at $58,000 and is fully eliminated for those earning $68,000. Similar increases pertain to married (filing jointly) taxpayers resulting in a phase-out between MAGIs of $92,000 to $112,000.
This past year, I worked fully for myself. Without an employer, I had no access to a regular 401(k), but I did initiate an Individual 401(k), which follows the same rules. By the end of the year, I expect to have maximized the employee portion of my 401(k) contributions at $16,500 with extra invested for the employer portion.
To lower your tax burden this year by up to $5,000, consider opening up an IRA (Individual Retirement Account). Mint.com has an IRA wizard that can show you what kind of IRA to open and where to open it.
My 2010 contributions fell short from the maximum by about $700, and a portion of that is due to leaving the company in the middle of December. I received the full company match, a 100% match on the first 4% of my salary that was contributed to the plan, in every pay period.
In 2009, I contributed the maximum $16,500, but I didn’t plan for an extra paycheck at the end of the year, so that last paycheck did not include a contribution to my 401(k). As a result my imperfect calculation, I missed out on a portion of my employer’s matching contribution. Some employers match after taking all contributions for the year into account, but mine contributes on a pay period basis. Any pay period that I did not contribute to my 401(k), the company did not match.
In 2008, I missed the full contribution amount by $1,000. That year, I made several changes to my contribution rate and lost track of what my rate needed to be in order to maximize my contribution.
| Year | 401(k) Maximum |
Catch-Up Contribution |
Maximum Allocation |
|---|---|---|---|
| 2012 | $17,000 | $5,500 | $50,000 |
| 2011 | $16,500 | $5,500 | $49,000 |
| 2010 | $16,500 | $5,500 | $49,000 |
| 2009 | $16,500 | $5,500 | $49,000 |
| 2008 | $15,500 | $5,000 | $46,000 |
Article comments
my new company no longer provides 401k – but my wifes still does.
can we “max” out her 401k contributions $16,500 + $16,500 ($33,000) to make up for both of us?
No. If you are not covered by a retirement plan at work (box will not be checked on your W-2) then you can more easily meet the tests for a deductible IRA or a Roth IRA. If you turn 50 or older this year, you can contribute more under the so-called “catch up” provisions.
I recently joined a company which has the Roth 401(k) option. Having not researched it enough at the beginning of the year, I diverted enough to make it under the $5K limit. From what I understand (per the IRS website), I could in theory divert the whole $17K into the Roth 401(k) option, which seems to me a better deal in the long run, assuming I can’t afford the extra few thousand dollars above $17K to put into the outside Roth IRA. Ideally, I could max out the pre-tax contribution and then start an outside Roth, though my salary is at the edge of where they would start to phase me out. Assuming my income keeps going up (it doesn’t look like I’ve reached an asymptote yet), then at some point within the next few years (and given good company performance, it would come quickly), I would no longer be able to contribute to the regular Roth. Given the power of compounding, it doesn’t make sense to leave a small amount of money in one place. Since I just refinanced my house to a 30 year loan (I first bought it in 2009), plus two kids, I have “enough” to write off at this point. Too bad we can’t write off 529s… Thoughts?
If I read this IRS publication correctly: http://www.irs.gov/retirement/participant/article/0,,id=151786,00.html
the individual or simple 401 is limited to a lower catch-up contribution.
Distributions from a traditional 401(k) are taxable as ordinary income. Relatively recently, the option for employers to sponsor Roth 401(k)s became available. They are not common at this point, but distributions from a Roth 401(k) would generally be tax free. In any case, distributions from a traditional 401(k) will be reported on a Form 1099-R as taxable. Since the contributions were not taxed as income when earned, the “cost basis” is zero. In other words, the entire distribution is taxable.
“Distributions” (after 60yrs) are taxable. Will they will be taxed at the same rate as any other income? I also have a question about the term “distributions”. Does this include the contributions that you made to the plan? Or only the earnings on these contributions? I think the answer is that all money taken out of the 401k is taxable. I just can’t find this to be documented anywhere. Is there any way to avoid this tax when getting your distributions after retirement?
Can my husband and I both contribute $17,000 pre-tax? i.e. $34,000 total when married filing jointly? Is there a max amount based on your income?
In general, yes. The one thing that could prevent that would be if either of you is a “highly-compensated employee” (generally an HCE is someone who made over $110,000 in 2011, but there are otherless common triggers) and your plan does not pass certain nondiscrimination tests, some of your deferral may be returned to you after the plan year. There are several ways plan sponsors can avoid having to return HCEs’ deferrals, but that’s their decision on how the handle it (avoid or refund).
i am new to all of this, but when i went to increase my contributions from 12 to 14%. I saw the message:
” IRS Contribution Limits–The annual Internal Revenue Code (IRC) limit for before-tax contributions and Roth 401(k) contributions combined is $17,000. This is the total amount you can contribute across all qualified employer plans you may be participating in during a taxable year”
But this is contradictory of what you all are saying here. So can I contribute more to my Roth IRA? With the 14% contribution, I will max out my 401K to $17,500. I have been really bad at contributing to my Roth IRA, but I would like to do much better this year and contribute at least $4000 or whatever the max is. Or do I have to get a traditional IRA instead?
It sounds to me that you are covered by a retirement plan at work (i.e., box is checked on your W-2). If so, you will be restricted on IRA and Roth IRA contribtuions. How restricted depends on your income, but doing some estimates based on the amounts you give, it’s likley that you cannot make a deductible IRA or a Roth IRA contirbtuon this year. As with all things taxes, you need to check out the rules and how they apply to your situation and/or consult a tax advisor.
@Over_50_G – Your only recourse this year is to point out the arithmetic of what has happened to you, and presumably others, to HR (and anyone else you feel could help) and request they consider amending the plan to implement a true-up matching contribution made after the plan year is over. Going forward, assuming they don’t choose to amend the plan, the only recourse is revert to your prior “match-maximizing” strategy and ignore the additional catch-up contribution amount. Or, defer your “match-maximizing” amount for all but the last paycheck (or two paychecks) and then defer all of the final paycheck(s) to get as much of the catch-up as you can (knowing that you are still missing a bit of the match).
@Andrew I have already made my spreadsheet to “game” next year by loading the entire catch-up onto my last two paychecks. As you say, I still miss out on some of the match. That raises a point that I think HR professionals should take note of: a person with a really big paycheck could manage to hit the $16,500 limit AND make a catch-up payment all in the last pay period, getting the full company match. A 50+ person making only $22,000 a year and contributing 100% of his paycheck could not avoid suffering the maximum possible loss of his company match. It’s a mathematical fact…how is that not discriminatory?
I feel your pain. Some HR people don’t even understand the arithmetic. Others do, but know that if they implement the true-up, they have to do it for every one, so Fianance will look at the cost of the amendment and ask why they are doing it.
I am a habitual 401k max’er and thought I knew all the rules. My company matches 50% of my contribution up to 6% of pay (i.e. 3% match) on a per-paycheck basis. When I turned 50 last year I understood my contribution limit increased from $16,500 up to $22,000. What shocked me was what happened when I hit $16,500 during the year. My company continued to post my 401k contributions as pre-tax, but no longer contributed the expected 3% match. I thought this must be an error and alerted our HR department, but the response was that “we don’t match catch-up contributions”. Given the per-paycheck matching and no true-up at the end of the year, this makes it mathematically impossible for anyone except someone with a huge paycheck to make a catch-up contribution and still get the full company match. I think this is unfair to say the least. I would appreciate any suggestions as to what I could do about this.
The increase is certainly good news, but most people aren’t able to hit the maximum. From an investment diversification standpoint, it might be best to shift some money over into a self-directed IRA since many 401k plans have limited investment options.
From a tax diversification angle, it’s better still to contribute some to a Roth IRA, so that not all investment vehicles will be taxable at retirement.
Higher contributions can help, but for most folks, working in some forms of diversification may be an even better play.
One additonal note – the AGI phaseouts for the deductibility of traditional IRA contributions are higher if you are NOT covered under a retirement plan at work. For example, from the IRS:
“For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000.”
Last year I contributed the maximum to my 401k but my employer has stopped matching with the economy so bad. Thankfully, they started matching again. My husband , who is over 50, is also making the max contributions. We need to play catch up.
Wow, this is a lot of information to digest. I suppose a lot of people just don’t have the income to make these contributions to the max. Combining this post with a former post—–do you think that the 9-9-9 plan will change the rules and levy a tax on a Roth IRA’s income? I mean, he says no exemptions, no deductions. That would be a crime!
Maxing out every year is tought for some people and perhaps not maxing out is a good thing because it allows you to have cash to diversify your investments outside of mutual funds. For instance, a couple of years ago, I bought some gold and silver which has greatly increased in value. If I had maxed, I would not have had the cash available to do so. I also need cash to pay mortgage and maintenance for my house that I am renting out. Unfortunately, I haven’t seen a 401K with a gold or precious metals fund and only one of mine from a former employer offers REIT’s.
I contribute about 10% to my 401K and I’m also putting money in my Roth IRA so I’m glad the contribution limit increasing is a good thing.
@Dawgette If it’s within your budget absolutely take advantage of both retirement savings options. The 401k has the benefit of decreasing your taxes and the Roth IRA will grow tax free. Best of both worlds!
It is wise to contirbute to 401K and Roth IRA if it is within your budget.
I know that this does not apply to 97% of U.S. population, but there is something to consider about your limit on contribution to ROTH IRA, it is $5,000 per person and it begins to phase out at $167,000 if you are married an filing jointly. That $167,000 is your MAGI (Modified Ajusted Gross Income). One of the few ways you can reduce your MAGI is by increasing your contribution to your 401(k) or 403(b). In should be noted, there are other ways to reduce MAGI, but most common deductions (i.e. mortgage interest) do not actually reduce MAGI.
So, if for some reason you and your spouse are hitting the limit on MAGI and do not max out your 401(k)/403(b), you are creating a dissadvantage to yourself as you are not able as a result max out your ROTH IRA. Of course, if your MAGI is over $167,000 and you are not maxing out your 401(k) or 403(b), you should probably be encouraged anyway to increase your contributions to save more towards your retirement.
Again, I completely understand that this does not apply to majority of households, but there are a few who may benefit from this interesting interplay of MAGI being reduced by increading your 401(k) or 403(b) contributions and thus able to continue to max out your Roth IRA as you approach that threshold.
Cheers,
PedroNY
I already did the $5000 to my roth in January. I’m maxing out my 401K this year for sure.
My employer matches the first 6% at 100%. In addition, there is another thing they put 4% or 7% (based on age) in a different account even if you don’t put into the 401k. There are some other things to that change it based upon how much you make above the SS wage base…but not there yet 🙂
sadly, i probably will not max out my 401(k) again this year, but i will keep getting closer. my company match is so low, it is depressing. they match 1%, regardless of how much i contribute. at the very least, i will max out my roth.
“Spillover Election
Continue contributing to your plan when your contribution amount reaches the maximum pre-tax limit allowed by the Internal Revenue Service.
What is a spillover election? ”
I copied the above from Fidelity 401k services. At 3 major US (and worldwide) co’s I had this same option. Fidelity is one of the largest 401k servicers so I would think this would be pretty readily available, but some companies may not have it.
My (fairly large sized) employer’s 401k services are handled through Fidelity and we do not have the Spillover Election… but now I know what to ask HR about the next time we talk.
It is called “true-up” usually in accounting. You should talk to you payroll if they “true-up” your 401(k) contribution in the end of the year. A lot of companies actually do this, and then in January or February they contribute an additional amount to your 401(k) based on how much they missed last year. Of course, in incredible rare cases this contribution is not allowed if they would hit over $49,000/year in total contributions — but that is very rare.
The “true up” of a match is a “fix” for people who max out before the end of the year. In order to be able to do it, there has to be a provision for it in the plan document. (It may be in the plan doc, or it may not.) It works like this: Suppose the er match is 100% on the first 6% of pay deferred. Suppose you make $100,000 in 2012 and defer 20% of pay. You’re deferrals will be stopped in early October ($17,000 limit / $20,000 target x 12 months = 10.2 months). Your match at that point would be $5,100. (10.2 /12 x 100,000 x 6%). If you had “maxed out” in the context being referred to in this thread, you would have figured the percentage(s) (you can change mid-year) needed so that you defer the final $17,000 in your last paycheck w/o ever dropping below a 6% deferral at any time during the year. But if the plan has a “true up” provision for the match (ask for the SPD & SMMs or the plan document even; you’re entitled to them), then there’s no need to sweat getting it exact. They add the part you missed shortly after the year is over when they’ve figured that, and a bunch of other things out – there’s lots of testing required behind the scenes..
Umm, you can’t really “max” out! Any excess contributions over $16500 are just after tax contributions (i.e. taxes are taken out of that amount. No need to miss any matching on a pay period basis. So you go over the max a bit (by one paycheck so what). My last 3 employers have matching and I can never hit it exactly, so I go over a little and still get the full match…I bet your employer does the same
I have worked multiple places where the contribution stops when you hit 16.5k. Unless there was some option I missed when I was filling out the paperwork… but certainly your experience is not universal.
I agree that many employers only match on a per paycheck basis and if you reach your max before the final check of the year you will miss out. They actually have their software set to stop matching when the employee hits his max. In effect they give a match on each payrolls salary rather than your annual total salary.
After-tax contribs are a separate election. The employer is supposed to stop your pre-tax at the limit. It is their job to stop it or return the money. If the don’t, they can get in trouble with the IRS.
Making it to the max can be tricky business. My employer only allows whole percentages as my contribution. Between that and unknown raises and bonuses, it has been surprisingly complex to max out my contribution as of the last paycheck.
My wife has it even worse. She usually gets some variable pay in her paycheck, which is enough to cover the max contribution. However one pay period last year, the variable pay was just a little short; rather than take what they could, the employer ignored the contribution request. So she missed a whole 1/12th of the allowed contribution.
You should be able to elect to defer a dollar amount. So, if you have 26 payrolls, and you’re trying to hit the $17,000 limit, you should defer $653.85 per payroll. The last payroll will be slightly less due to rounding.
Still looks like you are way ahead of the game compared to most Americans. Great job! Thanks for sharing with us.
That’s very impressive that you can contribute the maximum. I’ve been contemplating trying to contribute the max to my 401K and Roth IRA, but that’s $22,000 and equal to 32% of my salary from my primary job. If only we could scrape by for one year and max it out for both my husband (40% of his income) and myself, I think we would actually be able to retire at some point in the far, far future. According to my retiremnt calculator on mint.com, I’m officially 7 years and two months behind on saving for retirement. Ugh. At least it’s down from 7 years and four months.
I had requested that full allowable catch up be deducted from my pay in 2009. I learned when doing my taxes that this had not been done and only $16,500 was deducted.
Is it possible to deposit the catch-up money now so it will be reflected in my W-2 for 2009? I am keeping my fingers crossed that this is doable so I can file an ammended tax return with the new tax deferred deduction amount.
Any thoughts?
Actually, if you filled out an election form which indicated a higher amount than what was actually deducted, your employer would have to make a contribution to your account equal to 50% of what you elected, plus lost earnings. If you haven’t taken care of it already, I would see if you can get ahold of a copy of your election form. If the employer made an error, that’s an extra $2,750 in free money for you!
At my work place we have a 401k plan that my employer matches up to 6% of our salary. Myself, however do not participate in the plan just for one major reason: I simply do not trust anyone enough to hand my money to them, who knows for whatever reason in the future, I can’t take my money back; (it’s my phobia). I believe my hard earned money needs to be by my side, not in someone else hands.
The point about maxing out & missing the employer match isn’t well known. Many who can max out, pick a dollar amount and max out months beforehand, and miss “real” money. Thanks for sharing!
Flexo – You are absolutely correct. If you are contributing the max with no leaway for your 401k with your employer contributing their max, then I don’t understand why you would believe that you missed some “small matching contribution”. If you maxed out, YOU Maxed Out! Once you get to that level there are no “employer contributions”. They have also “Maxed Out”. YIKES! You got all there was and just wait for the first paycheck of 2010 for your next contribution.
You got 27 paychecks? Presumably you get paid bi-weekly and you got paid on the 1st of January and the 31st of December for this to have occured. Is that true? Does that mean you get paid on Thursdays?
I don’t know why employers paid bi-weekly. No one has bi-weekly bills, bills are monthly. It seems like a really screwy way to pay people to me.
Sticking to the schedule, January 1, 2010 would be a pay day but since it was a holiday I was paid the day before. Therefore it’s considered 2009 income. In 2009 our pay days were every other Friday starting with January 2.
I see.
That kind of stinks too. changes your annual wages based on when the bi-weekly pay day occurs.
I just always thought bi-weekly pay was a very strange thing in a 12 month calendaring system.
Now if we moved to my proposed 13 month calendar with 28 days in every month and 1 extra leap day hanging at the end of every December (2 on leap years) that is a free day and you make it a forced back to back saturday (guaranteed long 3 day weekend at the end of every year). Now you have a system that makes sense. Every month is 28 days, exactly 4 weeks. Quarters can each be exactly 13 weeks (3.25 months) Every day of every month is always on the same day of the week. Calendaring becomes easy and straight forward. This ancient calendar based on which Roman Caesar could force more days into his month than his predicessor is a bit antiquated.
Of course having 13 months would probably send the superstitious over the edge and since I would propose starting every month on a sunday that would mean that every month had a friday the 13th which would send them way over the edge. 🙂
Then bi-weekly payments would make perfect sense. 🙂
Hey Apex.. I am Apex. You will notice by the fact that I have a registered login. I suggest you try a different handle.
I have worked at two employers that put in a fixed amount per employee, and all you had to do was have an open account. (It might have been based on salary or other factors – I was never sure because in both cases, HR was a bit of a “black box”)
Petesea: I inadvertently left some draft wording in the article. Sorry for the confusion!
Flexo – you make it sound like there was a change in the contribution amount from 2009 to 2010. There was NOT, the change was from 2008 to 2009.
http://www.irs.gov/retirement/participant/article/0,,id=151786,00.html
That makes sense. My employer matches $.50 to the dollar to the maximum. So when i have put my $16,500 in, they will have put in $8,250, and there is nothing left for either party to contribute, regardless of when i max it out.
Flexo – Have to ask, because i haven’t dealt with it before and the last paragraph confuses me. If you have already maxed your 401(K) via your employer, wouldn’t their match be maxed as well. Why did you lose a bit of match the last paycheck?
For example, if i maxed out my 401(K) by June, i wouldn’t get anything from my employer in terms of a match after June as they will have maxed out the expected contributions as well.
Care to expand for me?
Brian: Here’s how that works. First employer matching contributions are not subject to the $16,500 limit. The way my employer and some other employers work is they say they will match my contributions dollar for dollar up to a certain percent of my salary. In my case that’s 4%. But they’ll only make that contribution in a pay period where I make my contribution. Since there were 27 paychecks in 2009, I calculated wrong and maxed out with one paycheck left it the year. Since my last paycheck didn’t include a contribution from me, there was nothing for the employer to match. Not every employer works this way but it’s fairly typical.
The 401(k) and IRA limits are separate, so $15,500/$20,500 for all types 401(k)s and $5000/$6000 for all types of IRAs, for a possible total of $20,500/$26,500.
@ fv: as far as I understand it, they’re separate so you could contribute up to $15.5k in a 401k and $5k/$6k to an IRA. An expert’s opinion to back that up would be appreciated.
Also, keep in mind that your employer may place a lower limit on contributions than the feds regulations provided above by Flexo. My work, for instance, only allows 25% of my salary to be place in my 401k so I can’t contribute more than ~$13k to my 401k.
Last year I contributed the maximum to my 401k and Roth IRA. It’s not quite clear to me whether the law allows that or if there is a contribution maximum ($15500 for BOTH Roth IRA and 401k). Thank you.
The law does allow that. The limits for 401k contribution and Roth IRA are separate and distinct. So you could have contributed $16500 to your 401k and $5000 to your Roth IRA if you are under 50 years of age. Hope that clears it up.
What do you mean by “danger”of missing out on employer match due to too high contribution rate? I believe employer match is not counted in 401K personal contribution limit. Can you clarify? Thanks
CalGal: Employer match isn’t considered in this 401(k) limit (there’s a higher limit that all contributions, including employer match, is subject to). In my case, my employer matches the first 4% of my salary, but it does so on a per-paycheck basis. That means that if I hit the limit of my personal contributions in September and can no longer contribute to my 401(k) for the rest of the year, I won’t receive any further employer match. In other words, I contribute 30% of each paycheck and my employer matches the first 4% of the paycheck. If I contribute 30% for the entire year and don’t hit my limit, the company also contributes 4% every pay period. If I contribute 50% of my paycheck and hit the limit before the year is over, the 4% match will also stop. If I contribute only 3% in any one pay period, my match will also be only 3%.
Many companies operate their matching contributions like this, but some don’t. I will maximize my employer match by making sure I contribute at least 4% of my salary each pay period while not exceeding my personal contribution limit. If I hit the limit early, the employer match would stop when my contributions do.
Thank goodness I read this. I made the same mistake twice in a row. I normally maxed out my contribution by early October so I missed out almost 3 months (paid bi-weekly) up to 4% of matching contribution. I will readjust for next year. Great article. Thank you for sharing; otherwise, I would have continued to missed out on some free monies, which of course, adds up overtime.
I agree about the raising of limits. I just wish they didn’t put restrictions on how much can be invested. Considering how much most people lost last year, it would be nice to take advantage of the down economy to help offset the losses long term.
I love that the government is raising these limits – it’s just sad that a lot of people will probably cut contributions after the way the market performed last year. It sounds like you aren’t falling into that trap – and hope all the other readers follow your example.
I contributed the maximum for 2008–$15,500. What I planned was to contribute enough each pay period so that my last check would secure my employers match, while giving me more cash for the holidays–about $375. Each pay period, I paid about $16 extra. It was great to have the cash “windfall” by “saving” throughout the year.