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11-24-2008, 07:29 AM
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#1 |
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Registered User
Join Date: Nov 2008
Posts: 4
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Contribution Limt as a Percentage of Compensation
The last time I researched this topic, the IRS had limited contributions to the lesser of some fixed dollar amount (currently 16,500 for 2009) or 25% of W-2 Compensation.
My understanding now is that the percentage contribution is now 100%. The most clear statement of this that I found on the internet was from a "California State University HR Letter" (http://www.google.com/url?sa=t&sour...Os0nQZ3Nb2llTYg). I've included the excerpt below: Elective Deferral Limits Is this accurate? I tried to look through the appropriate sections of the IRC, but quickly realized that would take considerable time to find and understand exactly what I'm looking for. Any support is greatly appreciated. Regards Last edited by sirsavalot : 11-24-2008 at 07:33 AM. |
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11-24-2008, 11:47 AM
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#2 |
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Registered User
Join Date: Oct 2001
Posts: 1,586
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For 2009, an individual can defer a maximum that is the lesser of their earned income or $16,500. Some plans may impose a lower limit.
For 2009, the total contributions from an individual PLUS the employer contribution can not exceed 100% of compensation up to $49,000. |
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11-24-2008, 04:09 PM
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#3 |
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Registered User
Join Date: Nov 2008
Posts: 4
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Many thanks for the quick response. Did this change just occur for 2009 year or has it been in effect for some time?
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11-24-2008, 07:05 PM
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#4 |
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Registered User
Join Date: Oct 2001
Posts: 1,586
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Sirsavalot,
These are the numbers for 2009. These numbers are some of the limits that are adjusted periodically for inflation. |
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11-24-2008, 07:40 PM
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#5 |
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Registered User
Join Date: Nov 2008
Posts: 4
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Apologies, I should have been more specific. I was refering specifically to the percentage of compensation. This used to be capped at 25% of W-2 (my memory stems from the 98' timeframe), but has subsequently changed. I was curious if this was introduced for 09' or had been modified much less recently.
Thanks |
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11-24-2008, 07:52 PM
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#6 |
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Registered User
Join Date: Jul 2008
Location: Huntington Beach, CA
Posts: 31
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Sirsavalot,
Are you self-employed or are you specifically referencing an employer's sponsored plan? Being self-employed changes all of that helpful advice that you received from ClydeWolf. Kenneth Besada Insurance/Financial Services EMAIL: Kbesada@FarmersAgent.com |
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11-25-2008, 07:54 AM
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#7 |
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Registered User
Join Date: Nov 2008
Posts: 4
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Kenneth,
Both my wife and I work, have access to 401ks, and neither of us are self-employed. My wife currently works part time and we live well within our means, so her income can be entirely directed towards savings. With the increased contribution limit as a percentage of W-2, we can shelter significantly more of her income from taxes to significant advantage (of course, this assumes taxes are heading up, the market eventually cooperates and 401Ks aren't "nationalized" ;-). The advice here has been especially helpful. I was just curious when the contribution limit as a percentage of income changed. We would only be able to take advantage for 09, since my wife's employer has just announced the ability to direct any percentage of income to 401K savings. Regards |
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11-25-2008, 10:09 AM
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#8 |
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Harold Hecuba Productions
Join Date: Sep 2004
Location: New Berlin, Illinois
Posts: 934
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sirsavalot, I think the 25% figure you're coming up with is in regard to employer-deductibility of contributions. The limit for deduction for business expense is the lesser of its contributions or 25% of compensation. (Compensation considered for each employee is limited to $230,000 in 2008, $245,000 for 2009 and subject to annual cost-of-living adjustments for later years.)
The only difference that I can think of offhand for the self-employed is that this figure is adjusted to 20% of compensation.
__________________
jb IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment). |
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11-26-2008, 10:30 AM
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#9 |
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Registered User
Join Date: Jun 2006
Location: various
Posts: 251
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I don't claim to know the answer, but I think I can clarify the question. As I understand it, if you make $20k (arbitrarily small amount) in 2008, you're allowed to contribute the full $15.5k.
Apparently this was not the case a few years ago, and the question is when did it change. Reference this article from fool.com which says you can contribute no more that 25% of your compensation. http://www.fool.com/retirement/reti...eport010423.htm "What's that? You say will earn $35,000 this year, but you still wish to contribute $10,500 to your 401(k)? Hmmm... lessee here... $10,500 divided by $35,000 comes out to... hey, that's 30% of your pay! It's great that you want to save that much, but that contribution is too high under the law. Your 401(k) contribution can't exceed more than 25% of pay, so that means your 401(k) deposit will be limited to a maximum of $8,750 this year."
__________________
Standard Disclaimer You didn't give me enough information to answer your question, so my answer might not be appropriate for you. In any case, don't take advice from me or anyone else on this board. It's not our life. It's not our money. You don't know who we are.
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12-09-2008, 01:40 PM
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#10 |
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Registered User
Join Date: May 2007
Posts: 124
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Quick reference for 401k limits
There are several sites that provide tables showing limits by year.
This one happens to be my favorite: : ) http://www.401ktest.com/pages/terminology.asp#tables Regarding the % limit (% of wages); this is determined by the plan document, correct? I know the limit can be up to 100%, but if the company is using a plan document with a lower %, then that's the limit for the plan. Please correct me if I'm wrong. Have a great day! |
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