The Simplest Guide to a 401K-Part 2

Here are some details one should know about a 401K:

  • In 2008, there is a limit of $15000 that an employee can put into his 401k account. This is a before-tax amount. For example, say you earn $50,000 a year. You can therefore allocate $15000 from this 50,000 and put it into the 401k account. What’s your taxable income? $50,000 – $15000 = $35000
  • Every year after you initially contribute an amount, you are allowed $500 more per year. This accounts for inflation.
  • Employees who are over 50 years old are allowed what’s called “catch-up contributions.” On top of the original $15000, >50 years old employees can allocate an additional $5000 per year into their 401k accounts.
  • This $5000 is also subject to an increase of $500 per year (to account for inflation).
  • If you contribute more than the set limit ($15000), the excess amount must be withdrawn by April of the following year. If you do not do so, you will have to pay a certain penalty as well as taxes on the excess amount.

 Please let me know if I missed any information or if something might be wrong.

Here is the link to part 1 of this topic:  The Simplest Guide to a 401K-Part 1

 

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