There are limits to what you can contribute to your 401(k) plan each year — but those limits are generous enough so that you can build a substantial account value over time. For example, in 2008, you can usually contribute up to $15,500, plus an additional $5,000, called a catch-up contribution, if you’re 50 or older. Those limits apply whether you contribute only to a traditional 401(k), only to a Roth 401(k), or if you split your contribution between the two types of accounts.
Generally you choose the percentage of salary you want to go into your plan. That amount is diverted from your paycheck to your plan account each pay period. But remember that the dollar amount produced by multiplying the rate you choose times your salary can’t be more than the annual limit. You also have the option of changing your contribution rate during the year, either to increase or decrease your contribution.
Some employers may limit contributions to a percentage of your salary to ensure that the company’s employee benefits stay within government limits. And if you’re considered a highly compensated employee (HCE), which means you earned more than $105,000 in 2007, the percentage of earnings you can contribute in 2008 may be affected by what lower-paid fellow employees contribute. There are specific federal formulas for determining the rate that would apply.
Employer matching
Some but not all employers match 401(k) contributions, adding to what you put into your account. A typical formula is to contribute 50% of what you defer, up to 5% or 6% of your salary.
Matching contributions are good news for employees, since they are a bonus that can significantly increase the value of a 401(k) account over time. So even if you can’t afford to put away the maximum amount you’re allowed, you should contribute at least enough to take full advantage of any employer match.
