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401(k) Contribution Limits for 2007

By JLP | December 6, 2006

For Your Information:

I recieved the following information in an email from my wife’s company and thought I would pass it on to you.

401(k) retirement plan contribution limits are increasing again in 2007. For employees under the age of 50, the maximum pre-tax employee contribution to 401(k) plans will rise in 2007 by $500 to $15,500. For those over 50, the limit on pretax elective deferrals will rise from $20,000 to $20,500 ($15,500 plus $5,000 in catch-up contributions).

Remember that these limits do not count against an employer match. In other words, if you make $103,333 and contribute 15% to your 401(k), you will meet the $15,500 limit. In addition, if you get a 3% company match you will get an additional $3,100 deposited into your account, making the total contribution to your account $18,600 for the year. Not too shabby.

One other thing: keep in mind that there are two maximums: 15% of your pre-tax income or $15,500, which ever is smaller. This is wrong. Sorry for the confusion.

The email went on to say:

Additionally, the annual defined-contribution limit (the most an employee and employer together can contribute to all defined-contribution plans combined) will rise to $45,000 from $44,000 in 2007.

Topics: 401(k), Retirement Planning | 16 Comments »


16 Responses to “401(k) Contribution Limits for 2007”

  1. JLP Says:
    December 6th, 2006 at 11:26 am

    William,

    No. This is about 401(k) contribution limits only. IRAs are a whole other ball-o-wax!

  2. M. Says:
    December 6th, 2006 at 12:23 pm

    “One other thing: keep in mind that there are two maximums: 15% of your pre-tax income or $15,500, which ever is smaller.”

    So if I make less than $103,333, I can’t contribute the full $15,500? That can’t be right…

  3. BD Says:
    December 6th, 2006 at 12:39 pm

    Where did the 15% of income limit come from?? I contributed well above that amount to max out last year’s $15K dollar limit. Is the 15% of income limit your wife’s employer’s limit?

  4. Brad Says:
    December 6th, 2006 at 4:09 pm

    I’ve often wondered whether it’s possible to use the employer match for a short-term gain. Does anyone know anything about this?

    Say, hypothetically, someone had no interest in saving for retirement (just grant this assumption whether or not it’s prudent). One option is to take the taxable $103,333. An alternative option, though, is to max out the 401k contribution for the year, earn the 3% employer match (suppose for the sake of the example that it’s fully vested), and then withdraw the whole account at the end of the year early, penalty and all (assume also for the sake of the example that value of the acct doesn’t substantially change over the course of the year — I don’t want that to be a factor in my hypothetical question). Which option leaves you better off at the end of the year? I guess the question comes down to, does the “free money” obtained by an employer match ever more than offset the penalty assessed for an early withdrawal from a 401k plan?

    Any thoughts?

  5. JLP Says:
    December 6th, 2006 at 4:16 pm

    Brad,

    I remember getting an email from you asking the same question but forgot to answer it.

    This wouldn’t work because you would be taxed on your contributions and you would be slapped with a 10% early withdrawal penalty.

  6. Brad Says:
    December 6th, 2006 at 9:13 pm

    Hey, thanks.

    But that’s what I don’t get.

    Case 1 (no contributions at all): Taxable income = $103,333.

    Case 2 (max-out 401k, employer match, early withdraw): 401k contribution = $15,500 + $3,100 (employer match) = $18,600. Early withdrawal (assume full vesting, no cap gains/losses) = $18,600 – $1,860 (10% penalty) = $16,740. Taxable income = $103,333 – $15,500 (401k contribution) + $16,740 (401k early withdrawal) = $104,573.

    Case 2 leaves you better off. (Remember, we’re operating under the assumption that one is ignoring the benefits of actually saving for retirement under the 401k.) Am I missing something here?

  7. Investorial @ InvestorGeeks Says:
    December 7th, 2006 at 12:38 am

    Brad,

    You aabsolutely are missing something.. the full $18,600 is taxable income.. not just the $16,740. The 10% penalty is additional to any taxes you incur

  8. Brad Says:
    December 7th, 2006 at 5:57 am

    Ok, so effectively what you’re saying is you pay taxes on penalty money that you never actually see. So the comparison is really:
    Case 1: Taxable income $103,333
    Case 2: Taxable income $106,433, plus you lose $1,860 after taxes

    What’s the after-tax difference on an extra $3,100? Even if you’re in the high 35% bracket, it’s only an extra $1,085 in taxes owed. $3100 > $1,860 + $1,085. Isn’t case 2 still preferable?

    In the end, of course, I’m interested in what general rule of thumb there might be — what sort of employer matches enable such opportunities? Thanks for helping me think through this.

  9. fin_indie Says:
    December 7th, 2006 at 11:27 am

    What I cannot understand is why we’re now only increasing the limits by $500 per year, whereas before we were twice that at $1000 per year. Does someone think we’ve solved the american savings crisis? I wrote a bit about this here:

    http://retiringearly.blogspot.com/2006/10/new-2007-401k-limits.html

  10. Free Money Finance Says:
    December 8th, 2006 at 6:20 am

    Star Money Articles for the Week of Dec. 4

    Here are interesting posts and news this week from the MoneyBlogNetwork members and beyond: Consumerism Commentary has some thoughts on Quicken 2007. AllFinancialMatters lists 401k contribution limits for 2007. MightyBargainHunter wonders how much his …

  11. Scott Ferguson Says:
    January 12th, 2007 at 4:44 pm

    If an employer makes a matching contribution to your 401(k), is that contribution subject to the contribution limit, or is it in addition to it? I can’t seem to find any information about this.

  12. Scott Ferguson Says:
    January 12th, 2007 at 4:45 pm

    Oh, woops, I read further. You answered it, thanks

  13. A Preview of the 2008 Federal Income Tax Brackets » Financial Consultants World Blog » Financial Consultants World Says:
    September 26th, 2007 at 2:35 pm

    […] 401(k) Contribution Limits for 2007 […]

  14. annerj Says:
    October 9th, 2007 at 3:56 pm

    “Hey, thanks.

    But that’s what I don’t get.

    Case 1 (no contributions at all): Taxable income = $103,333.

    Case 2 (max-out 401k, employer match, early withdraw): 401k contribution = $15,500 + $3,100 (employer match) = $18,600. Early withdrawal (assume full vesting, no cap gains/losses) = $18,600 – $1,860 (10% penalty) = $16,740. Taxable income = $103,333 – $15,500 (401k contribution) + $16,740 (401k early withdrawal) = $104,573.

    Case 2 leaves you better off. (Remember, we’re operating under the assumption that one is ignoring the benefits of actually saving for retirement under the 401k.) Am I missing something here? ”

    Wouldn’t it make even more of a case if you only did the 6% to get the match?
    Case 3 – (6% 401k, employer match, early withdraw): 401k contribution = $6,200 + $3,100 (employer match) = $9,300. Early withdrawal (assume full vesting, no cap gains/losses) = $9,300 – $930 (10% penalty) = $8370.

  15. Phillip Says:
    February 7th, 2008 at 6:57 pm

    Question: The annual defined-contribution limit (the most an employee and employer together can contribute to all defined-contribution plans combined) will rise to $45,000 from $44,000 in 2007.

    How does this effect your taxes? You get a tax break on the $15,500 but how does IRS treat the employer match in the tax year and then later at 70.5 yrs of age? Thank you.

  16. Scott Says:
    February 22nd, 2008 at 4:25 pm

    Keep in mind ‘annerj’ that if you cash out your 401k for the very meager after tax savings that you will likely be barred from 401k activity for 6 to 18 months per your employers plan document. So you got your $3100 in ‘free’ money, then lost $930 in penalties and then paid taxes on the money to the tune of 28% plus state and local taxes on the $3100. Assuming a 5% State and local you end up with $1147! yahoo!
    Then you are banned from your match per plan document and forfeit $1550 to $4650 in future free money…. not looking so good now I bet.

    If you need to tap more money borrow from your 401k and pay it back.

    Nice try though.

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