It is important to keep your eyes on what amount you are allowed to contribute to your 401k account each year. There are two different 401k contribution limits you need to be aware of. The government sets the limit allowable and the employer sets their own 401k limits for their employees.
U.S. Government Imposed 401k Contribution Limit Guidelines
Lucky for us, the government is beginning to understand the importance of saving for retirement and has started increasing the limits each year to help people save so they don’t have to rely on Social Security (which may not exist by the time I retire). Here are the current IRS 401k Contribution limits (you will also find information on catch up contributions):
2006 401k Contribution Limits
2007 401k Contribution Limits
2008 401k Contribution Limits
Employer Imposed 401k Contribution Limit Guidelines
Employers can choose their own maximum limit. For example, an employer might limit their employees to a maximum contribution of 10% of their salary. That means a person with a salary of $50,000 effectively has a contribution limit of $5,000 even though the government limit is higher. Of course, if an employee in the same company is making $250,000 and wants to contribute 10%, they can’t (because the government limits take effect). So the general rule is to determine what your employer allows, then take a look at the 401(k) contribution limits by year imposed by the government (use the links listed above).
Why Maximize?
To understand why you would want to maximize your contributions, I suggest you read Maximizing Your 401k Contributions. In short, you should at least take full advantage of your employers matching – because it is the best investment you will ever make (note: employer matching does not factor into the contribution limits listed above).
Playing Catch Up
If you are over 50 and your employer offers "catch-up" contributions in your 401k plan, then you may increase your contributions up to the amount the plan allows – no higher than the limits imposed by the IRS (use the above links by year to see what the catch up contributions limits are).
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