Limitations for IRAs & 401ks

IRA Limits

For the tax year 2011, workers 49 and younger can contribute up to $5,000 to their traditional or Roth IRA accounts, while those 50 and older can contribute an extra $1,000, for a total of $6,000. If you choose a traditional IRA, you can take a tax deduction for that $5,000 or $6,000. If you choose a Roth IRA, you give up that tax break but can withdraw the money tax-free when you retire.

Chances are, your 401k plan will become one of your biggest financial assets. That is due in part to the generous contribution limits these plans provide. For 2011, you can contribute up to $16,500 of your salary to a 401k plan, plus an extra $5,500 if you are 50 years of age or older. That means you can shelter up to $22,000 from taxes, all while building up long-term wealth for retirement. Of course not everyone will be able to make the maximum contribution, but those who can afford it should consider maxing out their 401k plans.

Some employers limit the percentage of income employees can contribute to their 401k plans, so you might not be able to make the maximum contribution allowed by the IRS. When you sign up for the plan, the literature you receive should list the minimum and maximum percentage you can devote to the 401k plan. If the maximum percentage still leaves you short of the IRS limits, you will not be able to max out your 401k. You can speak to your human resources representative about changing the plan in the future, but your current contributions will still be limited.

When you invest in your company's 401k plan, your investment options are limited to what is provided by the plan. Some 401k plans are better than others, but the plans typically include a number of stock funds, as well as an assortment of bond funds and a stable value fund that works much like a money market. Other 401k plans might include options for international investment, as well as the ability to buy stock in the company. It is important to review your 401k options carefully to determine the best mix of funds for your investment goals and risk tolerance.