401k Changes 2006

Last week we refreshed the articles in our tax section, and this week we've updated our retirement section to reflect changes in 2006. In this publication, we are going to review the changes to 401k plans in 2006. The other retirement topics, including IRAs, 403b plans, and Roth IRAs, have already been updated.

Maximum Contribution Limits for 401k Plans

For 2006, the maximum contribution limit to a 401k plan is $15,000.  That's up from $14,000 in 2005.  Future contribution limits for 2007 and beyond are increased for inflation, and that's thought to be around $500 each year.  That means the 2007 contribution limit will probably be $15,500.

Catch Up Contributions

For those of you that reach age 50 or older by December 31, you're eligible for an additional catch-up contribution to your 401k plan.  In 2006, the catch up contribution is $5,000, that's up from $4,000 in 2005.

Additional Contribution Limits

The contribution limits just mentioned apply to those made by the employee into their 401k account.  In addition to these limits, there are limits to all the contributions that can be made including employee contributions, elective deferrals, employer matches, and discretionary contributions to your account.

The total of all the above mentioned contributions cannot exceed the lesser of 100% of your compensation, or $44,000 in 2006.  That's up from $42,000 in 2005.  In addition, the compensation that can be used to calculate employer and employee contributions is capped at $220,000 in 2006, up from $210,000 in 2005.