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Managing savings through your company’s 401k has a tremendous number of benefits, but how much can you actually contribute to this retirement plan?

The 401k tax law can be quite confusing. For the most part, your 401k contribution limit depends on the lower of:

1. Your company’s 401k contribution limit compared to your income. For example, if you make $50,000 a year and your company limits contributions to 10% of salary, the most you can contribute is $5,000.
2. The government imposed 401k contribution limit, which is $15,500 a year for 2007 and 2008 (expected to adjust for inflation).

There is one exception to the above. If you receive an employer match, the total annual contribution to your 401k can actually be greater than the government regulated maximum. How? Your maximum allowable 401k limit does not include your company’s contribution. Let’s say you make $100,000 and you max out your 401k early by contributing 20% of your income. Let’s also say your company matches your contributions with $1 for every dollar you contribute up to six percent of your eligible compensation, (which is the maximum federally imposed employer contribution), or an additional $6,000. This brings your 401k balance for the year to $21,000, or almost 30% greater than the maximum contribution regulated by the government.

Other stipulations also exist, such as catch-up contributions, which allow employees 50 and older to contribute an additional $5,000 for 2007.

Millionaire Money Habit: As you consider how much you should invest in your retirment plan, remember that your 401k contribution limit is a pre-tax investment. What that means is you pay yourself before paying taxes or anyone else. This has many advantages, such as reducing your taxable income. If you invest in nothing else, take advantage of your 401k’s ability to make you a millionaire over time. -RT