The 401K plan allows you to save efficiently for the post-retirement life for individuals by maximizing your contributions. An amount is deducted from your pay check and in many cases, your employer makes equal contribution which doubles your savings. The advantage of this powerful savings plan is decreasing tax liability and enjoying the advantage of compound interests.
The savings compounds every year and there are no tax penalties. It is advisable to start the savings as early as possible in order to exploit the advantage of this plan.
The contribution limits of 401K retirement savings plan depends on various factors and can change every year. An annual limit is set every year and the amount varies accordingly based on the inflation rates and the value of dollar over time. In the year 2008, the limit was $15,500 for individuals younger than 50 years of age. These are pre-tax dollars. The limits are higher for those older Americans who may retire soon. For people who are above 50 years old, the total eligibility is $20,500 ($5,000 more). For the year 2009, the contribution limit is $16,500 for people younger than 50 years and extra amount of $5,500 is allowed for people over 50 years of age.
The 401K plan savings comes of use in case of economic crisis or sudden emergency financial commitments. In case you withdraw the funds from the 401K plan early, you need to pay a tax penalty. Hence, wisely choose your contribution limit based on the funds in hand.
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