Your 2008 401K Contribution Limits

By Richard Keir

The 2008 401K contribution limits are mostly unchanged from 2007 - except for the increase in the section 415 limit on total contributions which is discussed below. At the same time it is important to review the limits regularly and make sure you are within the guidelines - and if you haven't started a 401K plan or you've been skimping on contributions, remember that this is probably one of the finest opportunities you have to improve your future financial security.

While thinking about being retired can be a pleasant and relaxing way to pass some time, actually doing something like planning for your retirement seems to be a thing that way too may of us avoid or just let slip by, often until it's so late in our working life that building up retirement funds is a huge, extremely difficult and painful job. OK, so it isn't a real fun topic. Ignoring it, however, is a very stupid move. We all need to face the unpleasant reality that without doing some serious planning and actually accumulating those funds starting now, we may have a truly miserable retirement. Since 401K contributions are pre-tax, and since the contribution limits are pretty generous, this is a chance to substantial improve your life after retirement.

The 2008 401K contribution limits for employee contributions is going to stay at $15,500. This is the "elective salary deferral" portion of the possible 401K limits. What you need to keep in mind is that your employer will also probably set a specific limit such as 10% of your salary. In that case, the actual limit will depend on your salary and will be the lesser (it's always the lesser, isn't it?) of 10% or $15,500.

If you happen to be luck enough to work for an employer who will make a matching contribution, then it would be grossly stupid not to contribute to a 401K since it makes you an instant winner. Generally the employer will match on a less than dollar for dollar basis, say, 50 cents for each dollar, up to a percentage of your salary. So, as an example, if an employer will do a 50 cent match for up to 8 percent of your salary, you gain an instant pre-tax 4% put away for your salary when you contribute at least 8%. If your employer does do a match, then that's a deal you want to be sure not to miss out on.

It was a surprise to many that the anticipated increase in the "catch up" contribution didn't happen. Those over 50 have a chance to make an additional $5000 contribution next year that is in addition to any other contribution.

For the self-employed, there is an additional possibility. A profit sharing contribution of up to 25% of your eligible salary can go into your 401K. The exact amount depends on whether you are incorporated or unincorporated, but this is in addition to your salary deferral and any allowable catch up contribution.

Particularly for the self-employed, you need to be aware of the overall total 401K contribution limits which have increased to the lesser of 100% of salary or $46,000 for 2008. The catch up contribution is not included in this limit so under ideal circumstances and if you were over 50 years old, you could contribute $51,000 and still fall within the 401K limits.

For self-employed entrepreneurs, especially those over 50 with a substantial income this can represent not only a large tax savings but a very substantial addition to your retirement funds. With the control offered by a Solo 401K or Individual K plan, you also have maximum flexibility in choosing your own investments. Getting your planning in place now so that you can take the best possible advantage of the 2008 401K contribution limits is smart business and can greatly improve your quality of life when you do retire.