The IRS published the new 401k contribution limits for 2013. By law, these limits are adjusted annually for inflation according to the governments cost of living statistics. For the last few years, there have been several small adjustments upward because inflation has been relatively tame during the slow recovery from the U.S. recession.
The IRS also published increases for current 401k contribution limits.
2013 401k Contribution Limits
The 401k contributions limits in 2013 increased by $500 over the 2012 401k contribution limits. The maximum 401k contribution in 2012 was $17,000. The 2013 maximum 401k contribution amount is $17,500.
For 401k participants age 50 and older, there is a catch-up contribution available. The 2013 401k catch-up contribution is unchanged from the 2012 catch-up contribution. Using this provision, older 401k plan members can contribute an additional $5,500 per year into a 401k plan. With the catch-up contribution, the maximum 401k contribution limit for someone age 50 or higher in 2013 is $23,000.
Remember that 401k contributions must be made via salary deferral according the individual plan rules established by each employer. Many plans have rules that allow only a certain maximum percentage of salary to be contributed. In years past, the IRS limits were typically the higher of the two limits for many employees. However, even as the 401k contribution caps continue to increase, many plans continue to allow only the same percentage of salary as a contribution. For employees with these plans, the lesser of the two limits would apply. For example, a plan participant earning $80,000, in a plan with a maximum salary deferral of 15 percent would only be permitted to contribute $12,000 into the 401k plan, regardless of the higher federal income tax rules.
401k plans often have these contribution limits to avoid having the plan become “top-heavy.” IRS rules require that 401k plans do not excessively benefit company owners or the company’s high income earners. Higher compensated employees are more likely to contribute to the plan. They also frequently contribute a higher percentage of their income. In companies of a certain size, these factors conspire to create a situation where the highest paid employees contribute the most money to the 401k plan. To minimize this impact, the plan limits the percent that may be contributed. In this way, highly compensated employees are less likely to swamp the contributions made by other employees.
Check with your individual 401k plan’s administrator for details on how your particular 401k plan works.