Sun's Financial Diary reported that the 2010 contribution limit for 401(k) accounts will remain at $16,500. The announcement came from the IRS Thursday. There had been speculation that the contribution limit could be reduced in light of a decreasing CPI (and, indeed, the CPI is down from a year ago.)
Sun ends the post with a question:
Now that there won’t be any increase in contribution limit next year, it doesn’t seem to be a big deal for one year. However, it is a big deal in the long term for those who max out their contribution every year. Just consider this: How much will today’s $500 be worth 20 or 30 years from now?
(Presumably, had the limit been increased, it well could have been by $500, as previous increases had been in multiples of $500.)
The question becomes one of a tradeoff: Someone who would contribute the maximum allowable by law can contribute only $16,500 rather than $17,000. This means that $500 more of this person's investment contributions will be taxable in 2010 than would be the case if the contribution limit had been raised.
The contribution limit gets a lot of attention. I suppose it's the piece of the 401(k) puzzle that's easiest to grasp (after one understands the pre-tax contribution thing). It's the part of the legislation that is addressed regularly. It's the number that usually gets raised (“We can contribute more! Hooray!”) except next year it won't, and some folks — Sun among them — think this is a loss for people saving to retirement.
The question about how much extra income could have been gained by allowing that extra $500 to grow tax-deferred is insignificant. Why? Because the money (and accumulated interest and compounded dividends) will be taxed when it's taken out. Who knows what the tax rate will be in two or three decades? Would you want to be taxed now, or taxed later?
Going a step further, the tax tables aren't the only thing that can change. Just about all of the rules governing these accounts can change. How will the rules change, and to what extent? I have no idea, but just because they haven't changed significantly over their lifetime doesn't mean they won't.
So don't worry about not being able to contribute more to your 401(k). But I do encourage you to think about whether you're contributing too much to your 401(k) already.
As one who has been depositing to my 401(k) for 26 yrs, I know that the increase each year is not guaranteed. $16,500 is ok for me. $22,500 for my wife.
Your last line intrigues me. Too much savings? An AARP study showed that the second 20% (those between the top 40% and top 20%) of boomers are projected to have an average balance of just over $150K in retirement accounts. Hardly anything to worry about as being ‘too much’.
The question of wanting to be taxed now vs later is also a question of the following:
1. Do you expect to be making more now or later?
2. Do you think your tax bracket will be the same, higher or lower in the future?
For me, I think that I will be making less in the future in retirement. I also guess that my bracket will be lower than it currently is, or else, that taxes in the future will be higher for everyone. (Just think of all the debt our government has issued!)
Luckily for me, the question is a no-brainer since I’ve yet to max out my 401k. I should be doing that first.
This is great news. I plan on maxing out next year like last. I was worried the limit would be dropped and was not expecting an increase. So, I’ll take it!
Any news on the ROTH IRA contribution limits, is that staying at $5000? Thanks
Yes, 5K for you or 6K for those 50 or older in 2010.
JoeTaxpayer: Not necessarily too much savings, but too much contribution to the 401(k). You can save in other vehicles besides the 401(k).