IRS 401K Rules & Limits

401(k) plans have become a popular retirement plan benefit employers can offer their employees. Not only are 401(k) plans an easy way to save money (payroll deductions are automatically made to your account), 401(k) money is tax deferred. 401(k) amounts are not included on your 1040 form.

You control how much you can contribute to your 401(k). You can usually put up to 15% of your salary in a 401(k). The IRS 401(k) limits your total contribution annually. It’s $17,000 in 2012 and $17,500 for 2012 for employees. If the employee is aged 50 and over, an additional “catch-up” contribution is allowed. The additional contribution amount is $5,500 in 2012 and 2013 to traditional and safe harbor 401(k) plans.

You also control where your money goes using a list of mutual funds, stock, money market funds, etc. offered by the plan’s administrator. You will usually be able to change the funds you want your money to go to at certain times during the year depending on your plan. You can also roll over those funds into a new account if you change jobs. Or you may decide to keep the 401(k) from your previous employer, you’ll just need to meet some IRS 401(k) rules.

Employers can have different types of 401(k) plans, so be sure to research what your company offers. Some employers offer matching funds (usually a percentage of what you put into the fund) to entice their employees to take part in the plan.