2012 401k Contribution Maximum Limits

New IRS Rules for This Year. 401k contribution limits and withdrawal rules are changing both in the years 2011 and 2012. This is important because 401ks, along with Roth IRAs, are the most popular retirement savings plans. These types of retirement plans are have similarities to regular IRA limits in that they plans are administered in the financial sector, but regulated by the Internal Revenue Service (IRS).

Employees determine the percentage of their gross salary they wish to contribute to their account, and during the payroll cycle each pay period, that percentage is placed into the employee’s personal 401k account. Understanding the maximum contribution limits will greatly influence the investment choices each employee makes. Unlike contribution rules for SEP IRAs, certain 401k rules in 2011 and 2012 apply to all retirement plans, including: participant eligibility and withdrawal rules.

Do you have a safe harbor or traditional 401k plan? These are both treated the same. For the 2011 tax year, the maximum contribution to either a traditional 401k or a safe harbor plan is sixteen thousand five hundred dollars. For 2012, the IRS has raised this limit to an even seventeen thousand dollars. After 2012, these amounts will be determined by cost of living adjustments, as determined by the Internal Revenue Service.

Different rules apply to SIMPLE 401(k) plans, (not to be confused with Simple IRA limits) These limits are much lower than traditional 401k contributions. For both the 2011 and 2012 tax years, the maximum you can add to a SIMPLE 401k is eleven thousand five hundred dollars. These are subject to the same cost-of-living adjustments in future years.

Be sure you know your 401k deadlines. It’s important to note that these are universal contribution limits, but your specific plan may have its own requirements which limits the amount of salary you can defer.

401k catch up contributions are another important point to consider if you want to build up your investments. The IRS allows catch up contributions only to those participants who are fifty years of age or older. If your plan allows for catch up contributions, this allows you to exceed the normal 401k limits that you would otherwise have to follow.

For both traditional and safe harbor 401k plans, the catch up contribution allows for an additional five thousand five hundred dollars in 2011 and 2012. SIMPLE 401k plans allow for an additional two thousand five hundred dollars in 2011 and 2012.

Notes about Early Withdrawal. You may make early withdrawals from your 401k, but this will be considered taxable income. If you make the early withdrawal before reaching age 59 1/2, then an additional ten percent penalty tax will be applied. The 59 1/2 age limit doesn’t apply if you retire early and are at least 55 years old. It also doesn’t apply under certain circumstances such as death, becoming disabled and certain hardship circumstances.

Certain events are considered hardships and covered by special rules under the IRS code, including: medical expenses, damage to primary residence, educational expenses, and funeral expenses. At the age of 70½ years or when employment ends, the retiree is required to begin drawing funds and paying tax on the withdrawals.

Contact your financial adviser for assistance in evaluating the participating funds within the 401k where your distribution will be invested. Guessing at where to invest your money is not the way to optimize your returns. Market ups and downs can add unnecessary worry about long-term investments. Monitor the performance of your 401k on a semi-annual basis, but do not watch it too closely each quarter.