I hope I convinced you in my earlier article you’ll soon be dealing with higher taxes. I’ve got some more slightly depressing news for you… you might be dealing with a reduction in the amount you can contribute to your 401(k) in the near future.
Yes, as Robert Powell says in this MarketWatch article, to go along with retirees not getting an increase in their Social Security payments, you may be losing some of your ability to sock away money in your 401(k). Nice.
Contribution Limits
Currently in 2009, you are eligible to contribute $16,500 to a 401(k) if you’re under 50 and $5,500 more if you’re over 50. It’s also pegged to increase with inflation, $500 at a time. However, inflation (as measured by the non-seasonally adjusted CPI) is actually down by 2.1% over the last 12 months. What does that mean for your 401(k)?
According to a study by the consulting firm Mercer, if deflation continues through September, you’re contribution limit might be cut by $500.
Politically, Congress might end up stepping in if this scenario looks more likely. We’re only one month away from a potential rule change for 2010. The IRS set up the regulation to index the limit to inflation, which until recently seemed pervasive. Now that the limit is inflation based, it may be backfiring the first year that it matters.
What’s the Effect?
According to the CNN article, 7% of 401(k) account holders contribute to their 401(k) within $500 of the limit. So, off the bat, this probably won’t affect the vast majority of people. However, the population who max out their 401(k)s probably overlaps with the population who read personal finance articles to some degree. So, reader who maxes out your 401(k), how does this affect you?
Well, not a ridiculous amount, but certainly money you wanted to save before. Let’s say your marginal federal tax rate is 28% next year, and like me you live in California (paying 9.55% in state taxes). Your taxes just increased by $187.75.
Practical Considerations
Even though a $500 reduction in your contribution limit probably won’t set your retirement totally off track, it would still be notable to see a decrease in contribution limits in a time when Americans are being told to save more. Politically, it’s probably a non-starter, but stranger things have happened. Assume this news will get more press if it looks like Congress will have to offset an IRS rule change. What do you think?
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